1. Letting fear affect our investments
The human propensity for loss aversion compels us to act in a way that can limit our returns. If we act out of fear that our investments will lose money then we miss out on the possibility of gains, which is the whole reason we invest in the first place.
2. Relying on our previous results for future investing decisions
When it comes to financial decisions, we tend to be overconfident. After all, we earned the money in the first place, right? If our investments have done well in the past, we tend to assume it was skill on our part. If we do poorly, we tend to blame it on outside circumstances or bad luck. By using previous results as the basis for future investment decisions, your overconfidence might cause you to ignore outside advice and sound investment principles (such as looking at market performance over time).
3. Only investing in our employer retirement programs
401ks and 403bs are great options for the beginner investor, and you should certainly take advantage of any employer contributions to your retirement. But in many cases they don’t do enough to ensure tax efficiency in the future and they can be more risk averse than you need. By also investing in a Roth IRA or a brokerage account, you could set yourself up to pay less taxes through your lifetime and see greater returns.
4. Thinking about investments individually
When you look at investments on an individual level, it can be easy to see losses or gains in certain stocks or sectors and then put more income in areas that are making gains. Not only does this increase the chance that you are “buying high” but this silo effect means you aren’t looking at your portfolio as a whole. Viewing your investments individually, and taking action on that basis, can skew your risk tolerance to a level that either greatly exceeds or falls short of the amount you need to reach your goals.
5. Diversifying our investments only by asset class
When you think about diversification, you might be inclined to simply heed the axiom that you shouldn’t have all of your money in just stocks or bonds. However, diversification goes deeper than that. It’s important to consider things like diversifying by manager skill and company risk, as well.
6. Relying on so-called experts to pick stocks
The stock market is unpredictable, especially in the short term. Financial professionals who make bold proclamations about a particular stock might get viewers and clicks, but they don’t understand your goals. A sound financial plan will take into account your risk tolerance and broader goals.
7. Engaging in a stock market bidding war
Investing is all about maximizing returns. In a bidding war, hot stocks go to the person willing to pay the most. There are plenty of sound investments out there that do not require you to pay a premium based on “buzz” or the popularity of a brand.
Some of these mistakes are so common you may not realize you acted on them. If so, you’ve likely seen how these decisions can disrupt your financial plans and increase the anxiety you feel when it comes to managing your money. You can learn more about financial decision making mistakes and how to avoid them by downloading our guidebook.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Investing involves risk including loss of principal.
No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Wealth Enhancement Group is a Greater Minneapolis-based independent wealth management firm offering comprehensive and customized financial planning and investment management services. Established in 1997, Wealth Enhancement Group uses a team approach with a focus on simplifying their clients’ financial lives and has offices nationwide.