Dec. 13, 2018
- Investing can be a tricky business — one mistake can cost you financially in the long run.
- Even the most intelligent investors make mistakes when investing, and some mistakes are more common than others.
- According to the experts, investors shouldn't base their decisions on emotions, the timing of the market, daily trends, or a non-diversified portfolio.
In the world of investing, there are no sure bets.
With risks everywhere, investing can be a tricky business — if you're not careful enough, it's easy to make mistakes that can cost you financially down the road.
But mistakes are also a learning experience. We rounded up some of this biggest errors people make when it comes to investing, according to the experts, so that you don't have to learn the hard way.
Even the most intelligent investors are guilty of some of these mistakes.
1. Making decisions with your emotions
Investing can get emotional— money can cloud choices with "fear, greed, and nervousness," tempting investors to move their investments around, certified financial planner Shelly-Ann Eweka previously wrote for Business Insider.
One of the best things you can do for your investments, she wrote, is leave them alone and focus on a long-term investment plan.
"Avoid impulsively selling an underperforming investment and stay the course with a diversified portfolio that is able to withstand inevitable short-term rises and dips in the market," Eweka wrote.
2. Dipping into the market sporadically
Lumpy investing is when an investor invests inconsistently — and doing so can be a mistake, according to Chris Hyzy, chief investment officer at Bank of America Global Wealth and Investment Management.
"You get a small bonus check or something like that in the early part of the year, you immediately put it to work, and you stop," Hyzy previously told Business Insider. "You're not a consistent investor over the course of months and quarters and years, et cetera."
Investing inconsistently can prevent one from taking advantage of dollar-cost averaging, in which one invests a fixed amount of money in the market on a regular schedule to reduce risks.
3. Using cash
Millennials in particular are guilty of this investing mistake. Business Insider's Akin Oyedele previously reported that millennials prefer to use cash investments to set aside money they don't plan to touch for at least a decade, according to a Bankrate.com report.
However, this is one of the worst ways to earn returns.
"For investment horizons of longer than 10 years, the stock market is an entirely appropriate investment," Greg McBride, chief financial analyst for Bankrate.com, previously told Business Insider. "Cash is not, and especially if you're not seeking out the most competitive returns."
4. Not knowing how taxes affect your returns
Some investors don't realize taxes can affect your investments, before and during retirement.
"If you are working and have many years until you need to access your money, your taxes and strategy are a lot different than when you are retired and pay taxes as you withdraw money from the returns generated within a workplace retirement plan such as a 403(b) or 401(k)," wrote Eweka.
She recommends consulting with a financial advisor or accountant to create a retirement income plan with taxes in mind.
5. Waiting for the "all-clear sign" to time the market
Hyzy describes the "all-clear sign" as the moment you're finally comfortable financially — but there's an inherent problem in that thinking.
"You're technically never at your highest level of comfort and usually, when you are, it's when things are overvalued," he said.
Hyzy said that even a well-intentioned efforts to enter the market at a "good" time can not work out, despite having expert insight and training, if your timing doesn't align with the market's timing. "So, don't time the market," he said.
Timing the market is also known as selling high and buying low.
"It has been shown time and again that trying to outsmart the collective wisdom of the millions of smart, well-informed people who trade in the market is very hard to do consistently, no matter who you are," Derek C. Hamilton, certified financial planner at Elser Financial Planning in Indianapolis, told US News & World report. "Disciplined rebalancing keeps you away from that market-timing trap."
Financial advisor Eric Roberge said it's not about timing the market, it's about time in the market — the longer your money is in the market, the more long-term growth it will have.
6. Disembarking from your long-term plan
Letting daily trends influence your portfolio moves can end up putting your returns in a worse place. According to Eweka, many studies found that investors who hold a Standard & Poor's 500 Index Fund have better returns than those who buy and sell stocks themselves.
"It is important to develop a long-term investment plan and stay the course in order to reach your financial goals," she wrote. "This plan should be designed to provide a clear roadmap for achieving a range of needs and goals, from paying monthly rent or mortgage and saving for college, to investing for retirement, during both up and down markets."
7. Not diversifying your portfolio
There's more to diversifying your portfolio than owning several stocks — it helps decrease risk if you spread investments "across different asset classes," wrote Kira Brech for US News & World Report.
"Many investors think of diversification as simply owning more stocks, but do not realize you must also consider asset allocation as well as how your investments move in relation to one another, which is known as correlation," Michelle Jones, vice president at Bryn Mawr Trust in Bryn Mawr, Pennsylvania, told Brech.