Investing in the stock market is always a gamble and it doesn’t hurt to have a little luck on your side. But the difference between a successful investor and an unsuccessful one can be as simple as doing a few things right and avoiding certain mistakes. Steer clear of these eight common missteps and you can greatly improve your chances of achieving your investing goals, whether you’re a novice or semi-pro:
- Not starting early enough. Yes, better late than never. But with investing, the earlier the better. As many of us in the industry like to say, “It’s not about timing the market, it’s about time in the market.” The longer your money is invested, the more opportunity there will be for your growth to compound and your ups to far outweigh your downs. If you invest $10,000 for 40 years, assuming an average rate of return of 8% and no additional contributions, you’ll have approximately $200,000 more than if you’d invested for 20 years.
- Not saving enough. Unless you have lottery-winning kind of luck, you most likely will not be able to rely on stock or fund picking alone to succeed. Not only should you start investing as early as possible, you should also contribute as much as possible to your investments. If you have $10,000 invested and add $500 per month versus $250 per month for 40 years, assuming that 8% return, you will have close to $1 million more saved! The harsh reality is that most of us need to be investing 10-20 percent of our annual income in order to reach our long-term savings goals.
- Being overly aggressive. The stock market is hot right now, hitting new all-time highs in the past few weeks and prompting investors to pour money in. The same was true in 2007 and 1999. But what followed the year after those years was frightening and, in many cases, devastating. Taking advantage of a market rally is great, but be prepared for the inevitable downturn too. A varied and more balanced portfolio that includes less risky investments too can help protect you when stocks head south. Keep in mind that even mutual funds, which are inherently diversified to an extent, can be heavily concentrated in certain asset classes and therefore too aggressive for your risk tolerance. So make sure you know what you have and are comfortable with the risk potential.
- Chasing performance. There is a good reason why the financial services industry constantly preaches: “Past performance is no guarantee of future results.” Still, many people select investments solely based on recent returns. The danger is that if you invest in a hot fund or stock, you may jump in just in time for the freeze. Did you know that emerging market stocks was the top performing asset class in 1999 and 2007 and the worst performing class in 2000 and 2008? By having investments in a variety of asset classes you will better be able to share in the growth when certain classes do well while avoiding serious losses when some don’t.