Avoid these common investor mistakes when making investment portfolio decisions:
- Chasing performance. Investors often pull out of sectors that are not performing well, moving that money to high performing investments. But the market is cyclical, and often those high performers are poised to underperform, while the sectors just sold are ready to outperform. A classic example is technology stocks in early 2000. Many investors rushed to purchase technology stocks just as they reached their peak and were headed for a long slide down. Rather than trying to guess which sector is going to outperform, broadly diversify your portfolio across a range of investment sectors.
- Looking for get-rich-quick investments. When your expectations are too high, you have a tendency to chase after high-risk investments. Your goal should be to earn reasonable returns over the long term, investing in high-quality investments.
- Avoiding the sale of an investment with a loss. When selling a stock with a loss, an investor has to admit that he/she made a mistake, which is psychologically difficult to do. When evaluating your investments, objectively review the prospects of each one, making decisions to hold or sell on that basis rather than on whether the investment has a gain or loss.
- Selecting investments that don’t add diversification benefits to your portfolio. Diversification helps reduce your portfolio’s volatility, since various investments respond differently to economic events and market factors. Yet, it’s common for investors to keep adding investments similar in nature. This does not add much in the way of diversification, while making the portfolio more difficult to monitor.
- Not checking your portfolio’s performance periodically. While everyone likes to think their portfolio is beating the market, many investors simply don’t know for sure. So analyze your portfolio’s performance periodically. Compare your actual return to the return you targeted when setting up your investment program. If you aren’t achieving your targeted return, you risk not achieving your financial goals. Now honestly assess how well your portfolio is performing. Are major changes needed to get it back in shape?
- Letting market predictions cause inaction. No one has shown a consistent ability to predict where the market is headed in the future. So don’t pay attention to either gloomy or optimistic predictions. Instead, approach investing with a formal plan so you can make informed decisions with confidence.
- Expecting the market to continue in its current direction. Investors tend to make investment decisions based on current trends in the market. Thus, if the stock market has been performing well for a period of time, investors tend to move more and more funds into that area. However, when the markets have an extended period of above or below average returns, they have a tendency to revert back to the average return. For instance, following an extended period of above-average returns in the 1990s, the stock market experienced a significant downturn, helping to bring the averages back in line.
- Not understanding that saving and investing are two different concepts. Saving involves not spending current income, while investing requires you to take those savings and do something with them to earn a return. Saving often becomes easier when separated from the choice of where to invest. Find ways to make saving as automatic as possible, then take your time to research and select specific investments.
- Considering only pretax returns. One of the most significant expenses that can erode your portfolio’s value is income taxes. Thus, don’t just consider your pretax returns, but look at after-tax returns. If too much of your portfolio is going to pay taxes, implement strategies that can help reduce those taxes.
- Not realizing that help is only a phone call away. The investment world has become very complex, with a vast assortment of investment vehicles now available. If you need help with your investment decisions, please call.
Randall Wealth Management Group and Vanderbilt Financial Group are separate and unaffiliated entities.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by Randall Wealth Management Group or Vanderbilt Financial Group. Material presented is believed to be from reliable sources and PSEC makes no representation as to its accuracy or completeness.
Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss in declining markets.