9 Investment Pitfalls:
In our last video we covered the 8 retirement mistakes I see people making, you may check out that video by clicking the link here: https://youtu.be/rqUaV_QO0fg
In this video, I want to take it one step further and discuss 9 common investment pitfalls and give you a few ideas on how to avoid them. Let’s get started.
Before we start on our list. I would like to encourage you to complete our risk tolerance questionnaire, this questionnaire will help you determine the appropriate asset allocation for your risk tolerance. We even have an Investment Quiz where you can test your investment knowledge. You may them below.
History has shown us that successful investing requires discipline and patience. A long-term investment focus can help when emotions run high. To help you overcome challenges, I've compiled a list of common mistakes and guidelines.
[#1] Believing Investing is a smooth ride
- Nothing lasts forever. Markets go up and down.
- The Dot-com bubble and the great recession.
- High markets will pullback
- Investors can still find opportunities in a choppy market.
- The desire to pull out can trump long-term goals. Consider adjusting your investment mix to help take advantage of opportunities. Such as underpriced assets.
- Managing risk is a great strategy and can help you get through the next market decline.
[#2] Trying to time the market
- When people invest on the high and pull out on the low, they may miss opportunities by not remaining patient.
- The problem is investors are usually wrong, potentially missing out on the best market plays.
- For example, between 1986 and 2005, the S&P 500;s average return was 11.9%. This included Black Monday, The dot-com bubble, and 9/11.
- What’s the bottom line? Chasing the market’s top and the bottom is virtually impossible. No one can consistently do it.
- A better approach may be a small adjustment to help you stay the course.
[#3] Taking too much risk
- Not timing the market is one thing. Another mistake is having too much risk in your portfolio.
- Definition of RISK: The chance the investment you choose will perform differently than you anticipated.
- The object of asset allocation is to take on the amount of risk that still aligns with your long-term goals.
- When evaluating your portfolio, ask yourself these questions:
- Are you too heavily invested in one asset class, sector, or geographical region?
- Do you hold too many alternative investments?
- Do you hold many of the same investments or overlap too much?
- Is your portfolio correctly structured for your long-term goals, investment horizon, and appetite for risk?
[#4] Taking Too Little Risk
- Playing the market cautiously and taking on too little risk may also negatively affect your portfolio. While minimal risk can feel like a safe move, you could miss important market rallies.
- During periods of market turbulence, many investors tend to flock to low-risk investments like U.S. Treasuries and cash.
- This aversion to risk can affect long-term investments as too many fixed-rate investments put a cap on your portfolio’s profitability.
- Inflation is a concern in long-term investing, and too little growth can leave you with a shortfall in your retirement years. With inflation eating away at cash every year, most investors need at least some growth-oriented investments
- To know whether you should take on more risk, consult with your investment representative. Ask yourself the following questions:
- Do I have enough growth-oriented investments in my portfolio?
- Can I afford to take short-term losses for long-term gain? •
- Could I afford to live on Social Security or other income in the event my accounts decline in value?
- How comfortable do I feel taking on more risk to potentially achieve higher investment returns?
- Could I live on my investments without taking on additional risk?
[#5] Making Emotional Investment Decisions
- When markets swing, emotional decisions can wreak havoc on the most carefully designed investment strategies.
- Fear and greed can easily drive out financial decisions.
- Fear can cause us to abandon plans.
- Greed can cause us to chase investment fads and take on too much risk.
- As advisors, we can serve as the voice of reason when emotions run high.
- When markets decline, remember we can help answer questions, provide reassurance, and show you the opportunities that volatile markets may provide.
[#6] Failing to diversify
- Warren Buffet once said that “Diversification is a protection against ignorance” Meaning, no one knows everything about an investment, nor can they predict the future.
- Diversification consists of mixing asset classes by holding various stocks, bond, and cash. You can also have alternative investments, like real estate.
- Diversification helps avoid investing aggressively into one asset calls. If that one asset went south, ti could devastate your portfolio.
- To help overcome this risk, opt into a good mix of small-cap, mid-cap, large-cap, and international.
- While one sector declines, another may gain to offset the loss.
[#7] Focusing more on returns than managing risk
- Often, by the time the average investor decides to invest, experienced investors are already cashing in.
- Meanwhile, the not-so-savvy money continues to pour in beyond the investment’s prime.
- Don’t make this mistake. Stick to your strategy, rebalance, and focus on investments with great fundamentals, rather than returns.
[#8] Ignoring the Impact of Taxes
- One key rule is to always look at the after-tax return of an investment.
- At first glance, a 5% return beats a 3% return any day of the week.
- However, if that 5% return was from a taxable dividend and the 3% was from a tax-free municipal bond, the situation changes.
- 20-30% of your return could go to taxes, and would have a significant impact on your overall return.
- One tax-strategy to consider is investing in assets that generate income that is expect from federal taxes. Some are even exempt form state taxes. These are called Municipal securities and could give you an advantage for those taxable distributions.
[#9] Avoiding Professional Advice
- Having some there to help you make sound, logical investment decisions can help you overcome your own irrational perspective.
- 74% of American agree that they need more retirement preparation.
- 40% of those people don't know how.
- Professional Guidance can help.
- People who work with an advisor report more confidence in their ability to reach their retirement goals.
- We believe successfully navigating the investing world of today requires training, prudent management, and a commitment to a long-term, active investing strategy.
If you have any questions about the information included in this report, or would like more information about our services and experience, please contact us. We are happy to meet with you to help you build the financial life you desire.
I also encourage you to download our eBook on the 9 Investment Pitfalls. This books covers the topics in more detail and is great to share with family and friends.
You may download the eBook here: Download eBook
Thank you!