One of the best ways to become a successful investor is to not make common investing errors.
Here are five mistakes that you should try to avoid:
1. Ignoring investing costs.
Many people remain oblivious to the cost of their investments and it’s probably because they never receive invoices. If you invest in mutual funds, the fees are automatically taken out of your accounts.
What many investors don’t understand is that a fund that charges, say, 1 percent versus 2 percent is vastly different than your child getting a 97 percent on her math test rather than 98 percent.
Either way, your child earns an “A,” but a one percentage point difference in what a mutual fund charges you can mean the difference between retiring comfortably or spending each month during your retirement worrying about how you’re going to pay your bills.
Invest $10,000 in an inexpensive index fund that charges .2% in fees (assuming a 6% yearly return) and contribute $250 a month and 25 years later you’ll pocket $211,804. Pick a fund with a 1.2% expense ratio, with the same performance and contributions, and you’ll walk away with $178,489. That’s a difference of $33,315!
2. Watching too much television.
Avoid getting your investing advice from television. News outlets are keenly focused on what is happening in the markets that day or even that hour.
A lot of the chatter on these shows is devoted to guessing what will happen to the markets in the future. But studies have repeatedly shown that no prognosticator can consistently predict with any accuracy what will happen in the future.
Consider these shows as strictly infotainment. In fact, they really amount to financial pornography.
3. Not having an investment plan.
If you have a well-diversified portfolio based on your risk tolerance and time horizon, there is no need to worry about the ups and downs of the market. With a plan in place, you won’t be tempted to flit from one shiny investing idea to another. When you have a plan, you can invest with purpose and boost your chances of being successful.
4. Never rebalancing.
You won’t have to check your investments too often if your portfolio is set up prudently, but you will need to occasionally rebalance your holdings. That’s because some investments will perform better during any given period of time and some will fare worse.
Let’s say you originally wanted to devote 60% of your portfolio to stocks, 30% to bonds and 10% to cash. If stocks start riding a bull market, your equities could end up representing 70% of your portfolio or more. That level of equities could be riskier than what you are comfortable with.
To rebalance you would sell some of your winning stock funds and use the money to buy more shares in bond funds.
Rebalancing forces you to do something that most investors are unfortunately loath to do – sell their winners and buy more shares of their losers. And this behavior brings us to the last tip.
5. Panicking or celebrating too much.
Investors tend to get in trouble when the markets are on fire and also when prices are cratering. Investors can get too emotionally invested in their holdings, which can lead to knee-jerk decisions. For instance, during good times investors tend to want to double down and throw more money into stocks even though equities might have peaked and have become overpriced.
In contrast, investors tend to panic and dump their losers during bad times even though these investments are likely to be on sale.
As an investor, it’s best to remain emotionally even keeled.