Five Dumbest Investing Mistakes to Avoid
People in the US have done a pretty good “about-face” in the last couple of years. Savings has gone up and spending has been somewhat curtailed in the face of the uncertain economy. Saving more and spending less is great – but, when it comes to investing, there are a few common mistakes people make time and again.
- Loss Aversion. A common theme for investors is to hold on to a losing position (hoping it will bounce back). In fact, loss aversion causes some investors to sell all their holdings during market turmoil (we saw it happen a lot in the very recent past) and timing doesn’t work in the long run.
- Putting too much emphasis on the past. Investors tend to pour money into mutual funds that post strong performance numbers. Unfortunately, most of the time this is a bad decision; there tends to be a “reversion to the mean” after a strong year and I personally would rather buy low and sell high as opposed to doing just the opposite.
- Being paralyzed because of too many investment choices. I can’t tell you how many times I’ve seen 401k balances that haven’t been looked at or changed for an unbelievably long period of time. You also have people that just can’t bring themselves to move out of the “safe” environment (even partially) into something more long-term growth oriented (as in the record amount of cash still sitting on the sidelines today).
- Ignoring the costs of mutual funds and other investment products. These costs take away from your returns. One study shows that, during a 15 year time period, a low cost fund eats up less than 7 percent of your returns, while a high expense fund can devour almost 20 percent.
- Failing to understand the odds against beating the market. High transaction and management expenses, faulty psychology, and the law of averages often weigh down actively managed portfolios. Quite simply, it’s hard to beat the market.
Over the course of a long-term investment horizon, addressing these core issues can really make a difference in the “numbers” you see down the road.