Avoid these common investor mistakes when making decisions about your investment portfolio:
- Chasing performance. Investors often move out of sectors that are not performing well, investing that money in high performing investments. But the market is cyclical and often those high performers are poised to underperform, while the sectors just sold are ready to outperform.
- Looking for "get rich quick" investments. When your expectations are too high, you have a tendency to chase after high-risk investments. Your goal should be to earn reasonable returns over the long term, investing in high-quality investments.
- Avoiding the sale of an investment with a loss. When selling a stock with a loss, an investor has to admit that he/she made a mistake, something that is psychologically difficult to do. When evaluating your investments, objectively review the performance of each one, making decisions to hold or sell on that basis.
- Selecting investments that don't add diversification benefits to your portfolio. Diversification helps reduce your portfolio's volatility, since various investments respond differently to economic events and market factors. Yet, it's common for investors to keep adding investments that are similar in nature.
- Not checking your portfolio's performance periodically. While everyone likes to think their portfolio is beating the market, many investors simply don't know for sure. So analyze your portfolio's performance periodically. Compare your actual return to the return you targeted when setting up your investment program. If you aren't achieving your targeted return, you risk not achieving your financial goals.
- Letting market predictions cause inaction. No one has shown a consistent ability to predict where the market is headed in the future. So don't pay attention to either gloomy or optimistic predictions.
- Expecting the market to continue in its current direction. Investors have a tendency to make investment decisions based on current trends in the market. However, there is a tendency for markets, when they have an extended period of above- or below-average returns, to revert back to the average return.
- Not understanding that saving and investing are two different concepts. Saving involves not spending current income, while investing requires you to take those savings and do something with them to earn a return. Saving often becomes easier when separated from the choice of where to invest.
- Considering only pretax returns. One of the most significant expenses that can erode your portfolio's value is income taxes. Thus, don't just consider your pretax returns, but look at after-tax returns. If too much of your portfolio is going to pay taxes, look at strategies that can help reduce those taxes.
- Not realizing that help is only a phone call away. The investment world has become very complex, with a vast assortment of investment vehicles now available. If you need help with your investment decisions, please call.