Top 8 Mistakes Investors Make

  • By Jocelyn Black Hodes, DailyWorth's Resident Financial Advisor
  • May 16, 2013
  • Timing the market. Remember I said that it’s about time in the market, not timing the market. Studies have shown that, for most of us, trying to jump in and jump out of investments at the “right” time leads to more bad results than good. Also, the costs of frequent trading can significantly reduce returns, especially in taxable accounts. Assuming your investments are diversified and reasonably priced, you should hold onto them as long as possible and avoid knee-jerk reactions. Additionally, you will almost always be better off investing sooner than later.
  • Overpaying in fees. Many mutual funds have a one-time sales charge of up to 5.75% (a.k.a. “load”) and an annual expense ratio of 1.5 to 2+ percent if they are actively-managed, not to mention a potential “wrap fee” of 1 to 2 percent you might be paying a professional to manage your portfolio for you. While a few percentage points may not seem like a lot to pay at first, over the long run it can take a serious toll on your growth. Check out the SEC’s mutual fund cost calculator to see for yourself. And recent studies have shown that the majority of actively-managed, higher cost funds do not outperform their respective indexes. Bottom line: Managing your own portfolio and choosing no-load, passively managed index funds or exchange-traded funds whenever possible will help minimize cost and maximize your savings.
  • Underestimating inflation and taxes. Over time, everything gets more expensive. That is inflation -- one of the few certainties in life, along with death and taxes -- and it has averaged 3 percent over the past century. A million dollars may seem like a lot now, but in 30 years it will be worth much less thanks to inflation. At the current rate of inflation, you’ll need to save more than $2 million dollars to have then what feels like $1 million today. Combine that reality with income and capital gains taxes, and you will probably need to save a whole lot more for retirement than you might think. You should also maximize savings in tax-deferred and tax-advantaged accounts like 401(k)s, IRAs, and Roth IRAs, in which you can delay or avoid paying taxes on growth and future withdrawals.
  • Not rebalancing. Different asset classes grow at different rates and some grow much faster than others over a given time frame. For example, if you started out this year with a balanced portfolio of half stocks and half bonds, the surge in stocks over the past few months has likely caused you to have a larger percentage of your portfolio in stocks and a smaller percentage in bonds if you haven’t rebalanced yet. Depending on your risk tolerance, your portfolio might be too out of whack and uncomfortably aggressive. By rebalancing at least once a year, you can sell positions that have gotten too large and reinvest the proceeds in other positions that might help reduce risk (or increase it in some cases) and capitalize on opportunities in your portfolio. An easy way to help ensure appropriate rebalancing is to invest in target-date or “lifecycle” funds that rebalance automatically based on time horizon. Just keep in mind that these are actively-managed funds and typically more expensive than index funds or ETFs. Also, just because a fund’s target date might align with your savings goal time frame, it doesn’t necessarily mean that it aligns with your risk tolerance. So make sure to pick one with an asset allocation that you are comfortable with.

Bottom Line: save as much as you can as soon as you can, avoid high fees and taxes, diversify your investments, rebalance periodically and stay invested as long as possible. Follow these rules and your success as an investor will be much more of a sure thing.

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