What Are the Top Mistakes That Investors Make?
Investors are human and they make lots of mistakes. A panel at National Financial Advisors Week spotlighted some of these errors and had some good tips on how to avoid them.
When the stock market goes south is when a lot of mistakes occur. “History shows we are overdue for a correction,” noted David Callaway, editor-in chief of USA Today and the panel’s moderator.
The panel was held recently as part of National Financial Advisor Week in New York’s Times Square. This event, which attracted thousands of onlookers, featured financial advisors giving guidance on personal finance, ranging from retirement saving to college funding. The panels also focused on how people can get the most out of advisors. At the event, Jennifer Rufener of Dover, Ohio, won a sweepstakes for a free college education.
Some of the biggest missteps the panel warned against:
Market timing. This is when you aim to exit right before a slide and get back in to ride a rally. Mere mortals don’t possess those powers of divination. “If the average investor could figure that out, we’d all be living on a beach somewhere,” said Scott Kahan, president of Financial Asset Management. “They end up buying what already has done well,” paying too much and missing much of the run-up.
The panelists warned against jumping around, anticipating big market trends – better to get a good strategy and stay the course. “Time in the market, not timing the market, is the key to success,” said Blair duQuesney, investments director of Thirty North Investments. She pointed out that, in 2011, the market suffered after Standard & Poor’s downgraded U.S. debt and Europe endured a debt crisis. Stocks went on from there to score spectacular gains.
“When you’re ready to give up,” said Robert Schmansky, founder of Clear Financial Advisors, “that’s the market bottom.”
Failure to diversify. Putting too much money in stocks is risky because, while equities historically deliver the best returns in the long run, they are volatile in the short run. You need ballast from bonds, and to spread risk over other types of investments, like commodities. Kahan said some of his clients want to be in gold, and he tells them to place no more than 5% in the precious metal.
Disregarding taxes and trading costs. These can eat away at returns, often without an investor’s noticing. You need to hold an investment, in most cases, for a year before selling to be eligible to pay capital gains taxes. For most people, that is 15%, far less than they’d pay in ordinary income taxes. Hold for less than a year, and you pay the higher tax rate.
“Some investors hold for just two weeks,” duQuesney said. “They’re too fixated on gains.” Meanwhile, excessive trading runs up commission costs.
Lack of a plan. How you allocate your assets and update the mix over time are crucial. “When I drive from New York to California, I need a road map and an emergency fund for stops along the way,” Kahan said. For finances, those stops might mean buying a house.
“Most people don’t come to me with a plan” in place, duQuesney said. “They reach that time in life when the need one.”
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