Few investment strategies are entirely free of risk, but here are some mistakes that can be avoided.
1. Putting all your eggs in one basket
"One of the main investment mistakes I see results from investors not determining their level of risk and the type of investment mix that will allow them to sleep at night," says Tom Zaks, an investement advisor with RBC Dominion Securities. By having the right type of mix (e.g., stocks, bonds and cash), you can avoid issues with such things as emotional reactions to market downturns, like we have recently seen, says Zaks. "Diversification also allows you to avoid the mistake of putting all of your eggs in one basket."
2. Focusing on paying down your mortgage while higher-interest credit card bills pile up
"Many people are preoccupied with paying down their mortgage, while credit card bills pile up," says Aaron Sobeski, a financial consultant for Investors Group. "Consolidating high interest credit card debt into a line of credit can be a smart move. People must make sure they are serious about getting their finances in order before traveling down this road, by cutting up credit cards they don't need, [requesting] substantially lower credit limits on one or two cards and paying their monthly balance religiously."
3. Fixating on short-term success
"A regular review of your investment strategy and asset allocation is a good thing," says Zaks. "Chasing performance on a daily basis or trying to put your money into yesterday's hottest stocks can be a bad thing. Investors should try to avoid getting frustrated and selling too quickly by looking for instant results from an investment. Warren Buffett's approach of buying good quality investments for the long term usually wins in the end," he says. Think tortoise, not hare.
4. Being too meek or too aggressive
Some investors are just so afraid of the market they want to park all of their hard-earned savings into the safest investments they can find, regardless of how little interest it pays, Sobeski says, which is only a small step above putting all your money in your mattress.
"Investors would be wise to remember inflation. It slowly eats away at your savings, so by trying to avoid all investment risk, you've run right into another risk – inflation risk. It's easy to understand. Just go shopping with a senior and ask them how much the stuff you're buying used to cost. Sure a house cost $10,000 in 1950, but earning $3,000 a year was a pretty good income back then too," he says.
Although wages, houses, equities generally increase with inflation, cash doesn't. Diversity in your portfolio can help deal with inflation risk.
On the other hand, some investors are in thrall of risk. "A group of 15 penny stocks is not a diversified portfolio. It is much closer to gambling than investing," says Sobeski. "Real investing takes time, an understanding of the individual’s goals and a proper plan that can change along with the client. It's often boring and doesn’t provide exciting stories for cocktail parties, but it does work. Oh, and those people at cocktail parties telling stories about how much money they made buying one stock are often leaving out the other 14 stocks they lost money on," he says.
5. Paying yourself last
This is akin to the advice given to stressed moms: Take care of yourself first. "People can load all the numbers they want into a spreadsheet and somehow at the end of the month all the money is gone. For many people, budgets just don't work. In reality, we tend to pay our bills and whatever’s left over is for spending and saving. After paying for all the extra 'stuff' that comes up – like a birthday, a flat tire or a new shirt – it's usually all spending and no saving, effectively paying yourself last, after everyone else gets paid," Sobeski says.
Make a commitment to yourself and stick with it by paying yourself first, he advises. "It can be very empowering to make yourself your number one creditor. Try setting up a $100 a month withdrawal coming straight out of your bank account. By the end of the month you may not have any money left over, but you have already saved $100. You'd also be hard pressed to notice any change in your lifestyle."
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