Here are 10 investment mistakes that we frequently see and 10 ways to correct those mistakes and improve your financial situation. Thank you for visiting my blog – Ask a Fee Only Financial Planner.
- Lack of communication. If you split assets between different managers – be sure to coordinate so they and working in unison and considering what the other is doing.
- Overlapping investments. Evaluate your entire portfolio (from all accounts) and make sure you have a diversified portfolio and are not missing any asset classes.
- Trying to time the market. Hoping to guess when the market will go up or down. We recommend developing an investment portfolio that meets your risk tolerance and time horizon and you rebalance regularly and concentrate on long term returns not short term fluctuations (which are not predicable).
- Avoid buying high and selling low. Avoid making investment decisions based on the daily news. Keep to your long term plan. As Warren Buffet once said, Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.
- If it seems too good to be true, it probably is. The only principle that can be counted on is the benefit of asset allocation diversification.
- Not looking at the big picture. If you are only paying attention to one portion of your financial situation (such as just return on investments)
- Not understanding how much your investments cost. A shares take large initial commissions. B shares large fees upon sales and a higher ongoing commission. C shares have the highest ongoing fee. All of these commission fees go to the firm who sold you these investments unless they are truly fee only advisors.
- Overpaying for your investments. For investments that means invest in low-cost index funds not expensive actively managed funds.
- Chasing good past performance. Just because one asset class did well in the previous quarter or year does not mean it will continue to do so. We recommend sticking with your balanced, diversified investment policy and not chase after thing that did well in the recent past (see #4).
- Not considering tax consequences of your investments. It is important to consider what investments are in taxable and non-taxable accounts. Putting after-tax money into a tax differed annuity is an example of taking money you have already paid taxes on and paying future taxes on it again. Another example is not considering that when you pay back a loan on your 401k, you use post tax money (that will be taxed again) – if you are in the 25% tax bracket, it costs $125 to repay $100.
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