8 costly investment mistakes to avoid
April 02, 2014
So you have been diligent and saved your money. It would be a shame, then, to see that responsible behavior negated by investment mistakes. Unfortunately, that is often what happens.
Investment mistakes are common and come in a variety of forms. Here are eight to watch out for:
1. Bandwagon investing
Dating back to the 17th century tulip-bulb mania, there have been popular investment crazes that really can only be described as mass hysteria. Whether it is tulip bulbs or Bitcoins, the louder the hype, the more an investment should be avoided.
2. Letting CDs roll over and play dead
Too often, people just let their CDs be renewed automatically. This is an especially bad idea given the radical drop in CD rates over the past few years. Every time you have a CD up for renewal, you need to make two decisions: what length of term now suits your needs and the rate environment, and which bank offers the best CD rates at that length.
3. Mistaking volatility for risk
Beta is an investment statistic commonly used to measure the riskiness of individual stocks and stock funds, but it is not especially relevant to the reason people invest in stocks in the first place. Beta is based on quarterly price fluctuations, but your actual investment risk is the possibility for lasting losses, not short-term changes.
4. Defining risk too narrowly
The risk of losing money is just one form of risk. As savings account rates have demonstrated in recent years, another risk is having returns dwindle drastically. Investing conservatively is not necessarily the same as avoiding risk.
5. Shopping cart investing
An investment portfolio should be made up of coordinated parts functioning within a clearly-defined investment policy. The reality is that people tend to pick up investments here and there when they happen to come across something appealing. This is like going grocery shopping without a list -- the stuff that catches your eye and gets thrown into your cart is not necessarily the stuff you need.
6. Paying excessive fees
The paradox is that the investment business is both extremely competitive but also prone to excessive fees. In particular, avoid investment products with a sales load. Paying to get into or out of an investment inhibits your flexibility and adds an unnecessary layer of fees.
7. Failure to compare
When it comes to basic savings accounts, people too often just accept whatever their current bank is offering, even though the best bank rates are several times higher than the national average.
8. A high-water-mark mentality
Rationally, most investors know that stocks will go up and down in value, but there is a psychological tendency to assume each high water market is the new normal. The problem with this is that, as was common in the 1990s, it can leave people to overestimate their nest eggs and slack off on further saving.
Viewing this list as a whole, perhaps the strongest message is that there are many types of investment mistakes that people make every day -- and there are several more that are not on this list. The best solution to this is to be disciplined about your investment decisions and give them the time they deserve. After all, when you are investing for the long haul, there is no reason to feel rushed into a short-term decision.