For many people, reading about the stock market and investment products can seem like decoding a foreign language. However, a smart investment strategy and long-term commitment can play a significant role in pursuing your financial goals. With a little effort and a knowledgeable financial advisor, it’s easy to increase your investing ‘IQ’.
Here are 8 common mistakes smart investors avoid.
Avoid freaking out when the market drops.
In 2009, the market lost half its value in a year – hitting bottom at 6,667 on the Dow – but that was offset five years later when it reached 16,000+ in October of 2014. By Jan. 2, 2020, it was at 28,868, and investors with a disciplined plan were justly rewarded. Of course, the COVID-19 pandemic hit hard a little over a month later, and the market plunged back down to 18,591 before recouping those losses (and then some) a year later (the Dow closed at 32,731 on March 22, 2021). The point is, markets will go up and down, and selling stocks should not be driven by emotion. Analyze your risk, challenge your aversion to short-term loss, and don’t sacrifice your long-term reward. Sell low, buy high does not a successful investor make.
Don’t be irrationally exuberant.
Investing everything into a rocket-fueled, bubble-like market is just as dangerous as panic selling at the wrong time. Avoid putting in all you have at once and remember that a disciplined investment plan is the best way to take advantage of all markets. If you’re investing for the long term, you’ll catch up to the momentum by systematically putting money into your portfolio at good times. When markets are correcting, you’ll also benefit from purchasing at lower costs.
Don’t get dragged into day trading.
Day trading is not investing; it’s speculation. You might think it’s a way to make money faster, but it’s also a way to lose money faster. Over time, day trading provides inferior returns. Instead, view your holdings as investing in successful businesses, not stocks in the stock market. This is thinking like an owner rather than a day trader.
Don’t put all your eggs in one basket.
Investing in companies carries risk. Coupling a portfolio of professionally selected companies with well-researched Funds or ETFS can help buffer volatility, and diversifying asset classes with fixed income and cash will also soften the downsides in falling markets. A diversified portfolio delivers very reasonable returns that might allow you to sleep better at night. The objective is to stay ahead of taxes and inflation by realizing consistent growth in your portfolio’s value. The goal is not to “beat the market”.
Be wary the allure of the highest yield.
The higher the risk in an investment, the potential for a higher yield, but it’s important to proceed with caution. When chasing high-dividend-yielding and illiquid investments, the risks taken can’t be overstated. Is the company borrowing to make its dividend payment? Are the dividends high because the stock price is so low? Will the dividend be sustainable or will it be cut?
Don’t confuse cost with value.
In my opinion, there is too much emphasis on the share price of companies. A stock could be priced low due to its great value – or because not enough consideration has been given to what it’s worth. Conversely, a high-priced share doesn’t necessarily mean it is ‘worth it’ in value. Just because you pay more for something doesn’t make it better.
Avoid paying too much in fees.
As Dividend Growth Investor once tweeted, ‘If you invested $1,000 in Berkshire Hathaway in 1965, by 2009 your investment would have been worth $4.3 million. If Buffett had set up Berkshire as a hedge fund and charged a 2% annual fee plus 20% of any gains, the investor would have been left with only $300,000.’ As Nick Maggiulli, COO of Ritholtz Wealth Management and Dividend Growth Investor points out, “Imagine missing out on 90% of your investment due to hedge fund fee structures! Fees are the silent killer.”
Don’t ignore the impact on taxes.
The selections and activity in your investment portfolio have tax ramifications, and it would be a grave mistake not to consider them in your financial decisions. From long-term gains over short-term gains to tax-loss harvesting, tax-deferred vehicles and other tax-smart moves, it’s critical to keep your certified public accountant or enrolled agent in-the-know about your investments.
Investment income will likely play a starring role in your future – especially during retirement. Make smart decisions today so you can capitalize on your returns tomorrow.
Disclosures: Investments are subject to market risks including the potential loss of principal invested. Asset allocation and diversification do not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets. Past performance does not guarantee future results.