Understand and Avoid Five Common
Investment Mistakes

Most people will make at least one mistake as they learn the ins and outs of money management and investing. One of the keys to successful investing is to learn about and understand the potential pitfalls in advance and execute your strategy with the goal of protecting your money. Good investors also learn to admit to themselves when they have made a mistake so that they can change course and get back on track. The following is a list of some of the most common mistakes investors tend to make.

Not Paying Off High-Interest Debt: Before you get into any investment, it is best to eliminate high-interest consumer debt. An example of this would be high-interest credit card debt. If you’re paying 10%, 12% or higher, you need to pay off this balance first as a comparable return would be hard to get from an investment.

Paying Unnecessary Commissions and Fees: Today, you can thoroughly research and purchase just about any investment without having to work with a salesperson. If the investment you choose requires you to pay a high sales commission or exorbitant management fees, you are starting off that investment at a loss. It’s also worth noting that there is really no evidence to suggest that these high-cost investment choices perform better than others.

Ignoring the Risk Associated with an Investment: While risk is an unavoidable part of most investment strategies, some investments are more inherently risky that others. A big mistake people often make is looking at potential returns without regard to risk.

Not Diversifying: Diversification is about putting your money into different investment vehicles that perform well under varying circumstances. The first step in diversifying is to allocate your money to different types of assets: stocks, bonds, etc. You then further diversify by allocating to different areas within those assets. For example, within stocks you would allocate to different industries that perform well under varying stages of the business cycle and to stocks of different market caps.

Investing with Too Short of a Time Horizon: Investors tend to be too focused on the near-term. If you aren’t going to need the money for several decades, you should not be too worried about what the market is doing today or tomorrow or even next year and you should definitely not over-react. Make a long-term plan and stock to it.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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