The 20 Most Common Investing Mistakes! 11.10.2023
A turnover in football. A double-fault in tennis. A personal foul in basketball. A penalty in hockey. A fielding error in baseball. Everybody makes mistakes. And, just as these slip-ups can impede winning and success in sports, committing common investing mistakes can interfere with getting your money’s best performance.
Put differently, minimizing common investing mistakes can be just as important as optimizing performance when it comes to building and protecting your wealth and net worth!
Understanding that the world of investing and wealth-building is filled with pitfalls, potential blunders, and common missteps, at Towerpoint Wealth we believe that raising awareness and helping our clients and friends to AVOID the most common investing mistakes will help you to not only be more self-aware, but also to chart a stronger course toward a more prosperous financial future.
As any athlete knows, the only way to avoid mistakes completely is to not be in the game, and that’s the worst mistake of all!
Found below are 20 common investing mistakes to learn about the top 20 most common investing mistakes to watch out for, as identified by the CFA Institute.
Avoid Common Investing Mistakes
Just like winning in sports, building and protecting net worth requires careful consideration, discipline, guts, strategic planning, and sometime even a little luck. Additionally, never taking your eye off the ball and avoiding the most common investing mistakes plays a huge part in the success you enjoy throughout your longer-term wealth-building journey.
From making emotionally-driven decisions to neglecting due diligence, there are a myriad of common investing mistakes that can hinder the growth of your portfolio. Below, we delve into the top 20 to avoid, with each “pitfall” serving a valuable lesson serving a valuable lesson about how to go the distance with your portfolio. Whether you’re a seasoned investor or just starting out, understanding and sidestepping these common investing mistakes can make a significant difference in achieving your longer-term financial goals.
1. Impractical Expectations: Having realistic return expectations is essential. Measured expectations act as goalposts guiding you toward longer-term stability and avoiding emotional turbulence.
2. Absence of Investment Goals: Rather than being influenced by shorter-term trends and headlines, investors must remain grounded by their vision of their future and their longer-term financial aspirations, from one season to the next.
3. A Dearth of Diversification: Owning a myriad of different investments, and embracing diversification, helps to fortify your portfolio against the possibility that any individual stock, or any singular portfolio component, will shatter its foundation.
4. Short-Sighted Focus: The allure of a home run or long bomb pass is akin to the pursuit of shorter-term gains, but steadfastness to your initial strategy will keep you on course. Shorter-term market fluctuations should never impact a longer-term investment thesis.
5. High Buys, Low Sells: We obviously want to buy low and sell high, but with regular market gyrations and volatility, it’s easy to falter. Selling low and buying high can send your overall performance into the gutter. As Warren Buffett said:
6. Excessive Trading: Pioneering research from The Journal of Finance reveals that the most active traders trail the U.S. stock market by an average of 6.5% annually. As Jesse Lauriston Livermore said:
7. Fee Avalanche: Investment costs, expenses, and fees have the potential to erode your investments significantly, ruining the “gas mileage” of your portfolio, particularly over the long haul.
8. Tax-Centric Tunnel Vision: While minimizing income taxes is crucial, financial and investment decisions should not be solely tax-driven. Consider taxes only within a more comprehensive economic framework when making financial and portfolio-specific decisions.
9. Infrequent Portfolio Checkups: Review your portfolio, and overall financial, investment, and retirement plan at least semi-annually to ensure you are covering all the bases and adjusting your stance when needed. Don’t micromanage, but don’t fall asleep on the bench either.
10. Risk Misjudgment: Striking the equilibrium between too much and too little risk is the keystone to financial success. Risk is not a bad thing, as you need to take some amount of risk in order to achieve your goals. However, risk should always be justified, quantified, and properly managed.
11. Performance Blindness: Many investors don’t know the actual performance of their portfolio and investments. Evaluating gross and net (inclusive of fees and inflation) returns is an ever-important consideration.
12. Media-Driven Overreactions: Bad news and big headlines sell. While shorter-term bouts of negative news may trigger fear and emotional discomfort, it is important to remember that having a strategy, and being steadfast in sticking to it, should vastly increase your odds of longer-term investment success.
13. Inflation Oversight: Historically, inflation has averaged around 4% annually, slowly gnawing at your nest-egg. Be acutely aware of inflation, and account for it when developing and managing your financial, retirement, and investment plan and strategy.
14. The Illusion of Market Timing: Even a broken clock is right twice a day. Consistently (and accurately) timing the market is akin to chasing a mirage. Remain fully invested, be disciplined, and don’t give in to the temptation to jump around.
15. Neglecting Financial Advisor Due Diligence: Verify your advisor’s credentials and employment history through resources like BrokerCheck. If they have complaints or compliance issues on their record, ask them what happened and why.
16. Advisor Misalignment: Partnering with the right financial advisor is crucial, as they play a pivotal role in shaping your financial journey. A well-matched advisor not only provides sound guidance based on your goals and risk tolerance, but also ensures a collaborative and trusting relationship, fostering a path to and increasing your odds of having longer-term financial success.
17. Emotional Investing: Market, political, and economic events will inevitably stir our stomachs, but investing rationally is the creed during market squalls. As Warren Buffett said:
18. Yield Chasing: High-yielding, high-income investments often have the highest risk; a juicy dividend or lofty interest rate does not automatically make an investment a “good” one.
19. Procrastination: Time is a critical factor in wealth accumulation and compounding returns. Delaying investment decisions and putting off saving and investing can result in missed opportunities for growth, and limit the potential benefits of positive longer-term market trends.
20. Focusing on Things Out of Your Control: Market and economic shifts will always be unpredictable, but investors can increase their odds of success by managing their emotions, consistently saving and investing their money, minimizing expenses and taxes, and only taking as much risk as is necessary.
Steering clear of the 20 common investing mistakes outlined above is paramount for those seeking financial and investment success in the dynamic and unsettled world we live in. From setting realistic goals and maintaining a diversified portfolio, to resisting the allure of market timing and not chasing yield, these lessons serve as a playbook for increasing your odds of successfully building and protecting your net worth and wealth over time.
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