Five Investing Mistakes to Avoid
Let’s face it, we all make mistakes from time to time. But when it comes to our investments, the key is to steer clear of the biggest ones.
Here are five common investing mistakes you’ll want to avoid.
# 1. Waiting too long to get started
When you’re young and just starting to establish yourself financially, it’s really easy to put off longer-term priorities like investing. Chances are you have a number of more pressing financial obligations, like student loans and have and paying the bills.
But the sooner you can start investing, the sooner your can take advantage of compounding. Money invested in the stock market tends to double every 7 to 10 years. This means more time in the market creates a big advantage for early investors.
Even if you’re balancing multiple financial goals, it’s still a good idea to at least start investing, develop the habit, and contribute what you can. Eventually you’ll have more funds to commit to your investments, but getting started early is key.
► Learn how to start investing on a budget
#2. Overpaying in fees
When you invest, you’ll need to keep an eye on various categories of fees you could be paying.
For most of us, the optimal investment strategy will be to primarily hold an assortment of mutual funds and/or exchange traded funds (ETFs). And these charge annual management fees which will vary from about 0.1% (or less) on the low end to upwards of 1% (or more).
But higher fees don’t necessarily translate to better investment performance. So you’re probably better off sticking with low cost index funds which can save you a lot of money in the long run. Beating the market is really hard, even for professional money managers.
Also, if you decide to work with a professional, like a financial advisor, you’ll want to make sure you aren’t overpaying for advice. Again, more expensive is not necessarily better.
#3. Not diversifying enough
Diversification, along with interest compounding, is as close to investing magic as you can get.
By spreading your money across a variety of investments, you can reduce your risk of loss. If one investment goes bust, you won’t lose it all. And you’ll also reduce the day-to-day fluctuations in your investment account balance – when some investments are going down, others may be going up, which will smooth out your returns.
For most people, a reasonable amount of diversification can be achieved by investing in a handful of funds. Nothing too crazy. You just generally want to avoid having a significant portion of your wealth tied up in only a few investments.
#4. Forgetting about investment taxes
Investment taxes are another big one that’s often overlooked.
Sold an investment for a gain? You owe taxes. Paid a dividend on your stock fund? More taxes. Receive an interest payment on your bonds. You got it. Taxes again!
The exact amount will vary depending on the type of payment and your tax bracket. But rest assured, Uncle Sam will want a piece of the action. This is why it’s a good idea to utilize tax-advantaged accounts like a 401(k) or an IRA, which can help reduce your taxes over time.
And you’ll also want to pay attention to your capital gains and losses (which investments have gone up and which have gone down) before selling an investment (since you’ll owe taxes on the gains). Some robo-advisors and asset managers will automatically try to minimize taxes when they rebalance your portfolio for you.
#5 Letting your emotions take control
Investing is a great way to grow your money over time. But the stock market can and will fluctuate on a daily, weekly, monthly basis. And these fluctuations can wreak havoc on your psyche.
When the market is up, we all feel like a geniuses and want to buy more. And when it’s down, we tend to get panicky and feel the pressure to sell.
But you don’t want to buy or sell your investments based on these emotions. The key is to create a long-term plan and stick with it, regardless of what’s happening in the market on any given day.
If you can do that, you’ll be much better off in the long run.
Do your best to avoid them
As we said, we all make mistakes occasionally. But if you know what to watch for, and do your best to avoid them, your investments will be in a significantly better place down the road.
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