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Here are four of the most common errors people make when investing money. Avoid these financial mistakes and navigating the markets will get that much easier.
1. Buying high and selling low
Many people make this financial mistake every day. The adage is "buy low, sell high", yet the majority of investors do the opposite.
Just look at what happened during the financial crisis. People were buying stocks when the market was at its most expensive. Then, when it fell, everyone liquidated their portfolio. Savvy investors saw that the market was overvalued in 2007 so they sold off stock; they hung on to the ones that lost value because they know the market will eventually improve.
Why do people do this? People like following the crowd. A lot of us buy stocks when everyone else buys because we think there must be something to it. However, you should really buy a stock when no one wants it or when the market is at the bottom -- that way, when everyone gets excited, you'll have already bought the stock at a discount.
2. Buying on past performanceâ€¨
Fund managers love talking about how their fund performed over the last five years, but ask them how it'll do next year and they won't be able to tell you -- unless they can predict the future.
Past performance can give investors a good indication as to how a fund or stock performed in volatile times, but just because something returned 10 percent last year doesn't mean it'll return the same again. Use past performance as a guide, but don't expect the same returns in the future.
Page 1 of 2 -- Find out why it's important to rebalance your financial portfolio at least once a year on page 2. 3. Buying the company with the coolest gadget
â€¨A lot of people buy a company's stocks just because they think its product is cool. Now, that can work sometimes -- if you really liked the iPod when it came out and bought Apple stock, you'd be up about 4000 percent now -- but in most cases it doesn't.
If you think a business' product is going to explode, make sure to look at the company's financial statements, its price-to-earnings ratio (a good measure of how expensive a stock is) and whether it can actually handle the growth. Also, is this a product that will be hot for two months or 10 years? Buying just because you like a new gadget is a place to start, but it isn't enough.
4. Ignoring investmentsâ€¨
A lot of investors buy a few funds and then forget about them. That was okay in the ‘90s, when everything was increasing in value, but it's not so good now when the markets are so unpredictable.
At the very least, people need to rebalance their portfolios once a year. If the stock market increases, your asset allocation to stocks will increase while your bond allocation will fall and vice versa. You want to maintain your original asset allocation -- often 60 percent stocks and 40 percent bonds. Rebalancing will help get your portfolio back to where it should be.
Investors make plenty of other financial mistakes but these are some of the most common. Stop making these blunders when it comes to investing money and you may start seeing better returns.
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