10 Investment Mistakes that Carry Big Effects
Ignorance isn’t bliss when it comes to investing. It’s costly.
Though it’s normal to make mistakes when learning something new, money mistakes can take weeks, months or even years to recover from. In our experience as financial advisors in Gilbert, AZ, we tend to see some of the same mistakes again and again, and some carry serious financial consequences.
Below are 10 of the most common investing mistakes we see at Watts Gwilliam and Company. The good news: All are avoidable.
1. Chasing Trends/Not Understanding an Investment
Getting stock tips and armchair investment advice is very common, especially with beginner investors. This often leads to getting involved in investing trends or even fads.
In truth, there’s nothing necessarily wrong with following trends, and some investment trends pass the test of time. But generally speaking, if you are investing in a popular stock, sector or industry without doing your own research, you could be headed for trouble. Buying a hot stock, or any investment for that matter, without understanding why it’s popular or performing well is flying financially blind. Without any underlying research, you’re essentially gambling your money and putting yourself at serious risk. Understanding alternative investments is even more important.
No matter the investment trend, do your due diligence first, whether that’s researching it on your own or leaning on a financial advisor for professional guidance. At Watts Gwilliam and Company, we specialize in helping clients with more complex financial lives and alternative investments. If you have a question, let’s talk!
2. Panic Selling
Resisting the urge to panic sell can be very difficult. The combination of seeing red in your portfolio and listening to sensationalist news can cause even veteran investors to make a knee-jerk reaction. However, reacting can lead to selling low and buying high, the opposite of prudent investing.
Of course, market crashes are a real thing, and selling to avoid a significant decline can help prevent you from losing money, but it’s important to make investment decisions without emotion. Before you make an investment decision, think about your long-term goals. Taking a quick step back to determine the cause of the panic can be the difference between making an informed selling decision and an emotional one. As financial advisors in Gilbert, AZ, the team at Watts Gwilliam is happy to offer a second, objective, educated opinion.
3. Becoming Over-Concentrated
Concentration can make money, but it can also burn it. If you over-concentrate your investments, you can greatly increase your risk of losses. A lot of investors become over-concentrated because they don’t review their portfolio on a regular basis.
Suppose one of your investments in a particular stock, sector or asset class performs exceedingly well. That particular investment will grow more than your others, causing your portfolio to become out of balance. Even though it’s due to strong returns, if you don’t rebalance your portfolio, your over-concentrated position can plummet just as quickly as it grew.
Read our recent blog post: How to Turn Concentrated Stock Holdings into Income Generators.
4. Starting Late
Even if you make money on every investment, the time value of money will always be a factor in your wealth building. Simply put, money needs time and returns to grow. The sooner you start making sound investments, the more room you have for financial growth. If you do start late, you may need to add sizable chunks of money to your portfolio to make up for lost time. If you start early, you’ll put time on your side, giving your money a stronger chance to grow over time.
5. Trying to Time the Market
Trying to time the market is one of the most common mistakes we see investors make. And it can be one of the most expensive! Timing the market is a very difficult game to play, and it can be unnecessary.
As we say at Watts Gwilliam and Company, “Time in the market, is better than timing the market.” This is especially true for DIY investors whose backgrounds aren’t in the investment world. Attempting to time the market can cause you to unnecessarily miss the boat on investment returns.
6. Failing to Diversify
Failing to create a diversified investment portfolio can leave your money unprotected.
The market is made up of dozens of different asset categories, and these asset categories don’t move in the same direction. When one sector zigs, the other may zag.
For example, last year, technology stocks rallied, but oil stocks got crushed. Owning a diversified portfolio has a greater safety advantage during volatile markets, as you’re not putting all of your financial eggs in one basket. Portfolios that aren’t diversified often have little to no safety cushions at all, and can experience the full severity of a downturn.
Read our recent blog post: Why Diversification is Important: Financial Advisor in Gilbert Explains.
7. Following Bad Advice
Without foundational investment knowledge or a solid investing framework, it can be easy to get sucked into bad investing advice. There are a number of popular misconceptions out there, plus oversimplified analyses of the market.
If you’re unsure about investing advice you received, be it from a co-worker, friend or online, get a second opinion.
8. Investing Too Much
Investing can be a powerful tool to help your money grow, but overdoing it can rob you of your savings. Additionally, constantly dumping money into an investment with low-potential or an otherwise stagnating position will eliminate other investment opportunities.
Another danger of investing too much is you risk becoming over-concentrated.
This can happen to high net worth investors as well. Just because you may have more money doesn’t mean you’re necessarily investing the right amounts in the right places. Check out our new guide: Investment Management for High Net Worth Individuals.
9. Investing Too Little
An investor’s risk tolerance is crucial when creating any investment strategy, but so is his or her risk capacity – the amount of risk you “need” to take in order to reach your financial goals. Invest too little, and you may not get the returns your financial plan requires. Finding the right balance is key.
10. Not Getting Help from a Financial Advisor
If you’re not 100 percent sure about where and how to invest your money, working with a financial advisor can be a game-changer. Not only can a financial advisor answer your personal finance and investment questions, but a financial advisor can create and implement a financial plan customized specifically to you.
Without a financial advisor, you’ll have to manage the heavy lifting of articulating your financial goals, thinking about the future, picking your investments, reviewing your portfolio every year and rebalancing when necessary, all on your own. You may not have the time, know-how or energy to manage all of the moving parts of your financial life alone, and this can lead to some expensive oversights.
The Bottom Line
Financial pitfalls can be costly. Working with a financial advisor can help you avoid common missteps and provide a sounding board in volatile times.
Watts Gwilliam & Company is a fee-only, fiduciary financial advisory firm headquartered in Gilbert, Arizona that serves investors nationwide. Our firm was established to provide a conflict-free environment that’s dedicated to our clients’ success. We provide innovative investment and financial planning strategies to help build wealth, generate income and secure the future. If you’re ready to have a serious conversation, let’s talk.