6 Mistakes Common to Most Investors
August 15, 2013 | By Steven DiGregorio
With stocks at multi-year highs, many people are thinking about getting back into the market. But before you run off to open up a brokerage account or start playing with your IRA/401(k), it’s important to remember that the stock market has plenty of risks along with those potential rewards.
The good news is that investors who have cool heads can make it through. The biggest mistakes that rookie investors make tend to be psychological ones—and simply knowing these pitfalls and keeping perspective can result in significantly better returns.
Here are six common mistakes that many investors make:
- Chasing the herd: Everyone knows the phrase, “buy low, sell high.” But frequently, the opposite holds true, as popular investments get widespread media coverage, and investors wind up buying in at a very high price after the run is mostly past. A good example is If you had purchased Apple (AAPL) at a price of $700/share in 2012, The rule of thumb is that momentum swings both ways, so don’t make investing decisions based only on what’s popular at the time. Know what you’re buying.
- Time to Capture Gains: The other side of the “buy low, sell high” that investors forget, is the idea of exiting at the top. Often people fall in love with an investment that has done well, convincing themselves that if it grew 50 percent this year, it will grow 50 percent more next year. Unfortunately, that kind of track record isn’t common, and it’s safer to trim back a bit before the stock loses its luster. If you sell half your shares, for instance, you lock in some profits while still participating in a little bit more upside, should the run continue.
- Time to Cut Losses: Of course, investments that lost value can be hard emotionally to sell. Nobody likes to lock in a loss, and it’s easy to convince yourself that the deep declines are short-lived and that a rebound is right around the corner. So remember this: If you invest in a stock that plummets and you need to make 20 percent to get back to even, there’s no rule that requires you to make that 20 percent in this specific stock instead of an alternative investment. Why not move your money? It’s often easier to find a new investment with a brighter future rather than depend on a battered stock to somehow turn things around.
- Getting greedy: If you have big confidence in an investment, putting a lot of money behind it often sounds like a good idea. But it’s awfully risky to put all your eggs in one or two baskets. Always err on the side of diversification, and never allow a single position to represent more than 10 percent of your portfolio —even if you think it’s a “sure thing.” While a big bet pays off quickly when you’re right, it can cause serious damage when you’re wrong. Better to play it safe and stay diversified, even if it means not going “all in” on your favorite stock.
- Timing the market: Countless reports show that timing the market—that is, trying to sit out the bad times and jump in when things are better—does as much harm as good. When you sit out the market, you often fail to participate in rallies; when you go all-in, you often pick the wrong time to buy. Then there are the extra trading fees and short-term capital gains taxes, not to mention the added stress. Unless you have a crystal ball, stick to long-term investing instead of jumping in and out.
- Improper Portfolio Diversification – Simply put, having investments spread out among different asset classes in the capital structure is not effective enough diversification! Sorry, your broker is not telling you the whole story! Limited correlation is the imperative to good diversification. In other words, investments that truly perform differently from one another in various market conditions. Examples: 1) Stocks vs Bonds, 2)Technology vs Utilities or 3)Commodities vs Treasuries
Avoid these common missteps and removing the emotions inherent in money matters will pay big dividends!!
For more information contact Compass Asset Management Group, LLC at 845.563.0537or Contact@CompassAMG.com
The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
401(k), asset allocation, buy low, capital gains, coorelation, diversification, diversify, gains, greed, herd investing, investing mistakes, investments, IRA, losses, market losses, market timing, money, portfolio, sell high, stocks
STEVEN M DIGREGORIO is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
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