Investment Advisers Help Investors Understand Common Mistakes
10 Common Mistakes Investors Make
Given the recent experience in the financial markets, many investors are feeling like the world has somehow changed and this time things are different. Of course, every economic downturn is unique and this “Great Recession” we are experiencing has been no exception. This recovery will likely be slower and weaker than previous recoveries. The key point is that we will recover from this recession and the financial markets will respond favorably as our economy improves and grows to new levels over the next several quarters.
Over the years, I have seen many investors who have viewed economic downturns as an opportunity to invest in financial assets at deeply discounted prices. These investors are not just lucky but understand that investing during downturns is the best time to buy. However, there are some investors who seem to make the same mistakes over and over. I thought it might helpful to remind ourselves of some of the most common investor pitfalls that are most often repeated. Here they are in no particular order:
1. Trying to time the market. Market timing assumes an investor can accurately predict future market fluctuations. If you guess correctly and sell before a downturn, you will then need to guess right again as to when to buy. Very few investors have been successful with this strategy over the long term.
2. No clear written investment strategy. If you don’t have a plan, then you will never know if you have achieved your investment goals. A clear strategy defines the amount of risk you are willing to take, and provides a method to measure your progress toward your goals.
3. Lack of diversification. Diversification by asset class, investment style and individual funds or securities reduces risk and volatility over time. Large concentrations in any one area are akin to making a big bet.
4. Not rebalancing investments periodically. Rebalancing on a regular basis keeps a portfolio in line with the investor’s original strategy so certain investments do not get over weighted or under weighted due to changes in market values. This is another important tool for keeping your portfolio’s risk profile from changing dramatically over time.
5. Selling after a drop in the market, and buying after the market has gone up. Most emotionally-driven investment decisions result in lower returns. It is critical to stay objective when evaluating when to sell and when to buy as it is human nature to react emotionally instead of rationally.
6. Ignoring your investments entirely. I don’t need to say much about this mistake other than it can be very costly. When in doubt, seek competent, objective advice on what to do.
7. Becoming emotionally attached to any investment. This may seem like an obvious mistake but it happens quite often. Investments are not friends but a means to achieve financial goals. Staying objective allows an investor to make a reasoned business decision on every investment.
8. Not updating beneficiary designations. This is often overlooked and can cause major estate planning and tax problems. Beneficiary designations should be reviewed for accuracy on an annual basis.
9. Not having a current will, powers of attorney or trusts. We all work hard to achieve our financial goals usually over a long period of time. The easiest way to protect your nest egg is to have an up-to-date estate plan to provide a safety net for yourself and family if the unexpected happens.
10. Not having a trusted financial advisor. It is more important than ever in the current economic and investment environment to have someone who you trust to provide objective, honest advice. So find a professional investment advisor who is credentialed, experienced and knowledgeable. It should be someone you feel comfortable talking to, and who takes the time to fully understand your personal situation. You should have no problem finding a competent local financial advisor. Seek out a professional who is invested in our community, and an individual that you can meet with face-to-face on a regular basis. Ask your banker, accountant, or attorney for a recommendation.
Louis J. Beaulieu, ChFC, CTFA, AEP Managing Director, Senior Vice President Investment Advisory Group Enterprise Bank
About the author: Louis Beaulieu has over 30 years experience in investment management. He is a Chartered Financial Consultant. Louis services a wide range of clients – professionals, non-profits, individuals and businesses. He assists with financial planning, including investment strategy, and retirement and estate planning. Louis is involved in a wide range of local non-profit organizations, serving on several boards in the Greater Lowell area.