Wednesday, July 18, 2012

7 Investing Mistakes That Make You Look Dumb

When you watch the anchors and analysts on TV business channels, you may tell yourself that you can be as smart as they are when it comes to investing. In truth, you should probably set a more modest goal: investing without doing anything really stupid. Because it's a lot easier to lose your fortune with a few ill-advised trades than it is to earn it back.

What is the best strategy? Keep your wits about you, stick to fundamentals, and avoid these seven dumb investing mistakes.

  1. Putting all of your eggs in one basket. The first three rules of investing are diversify, diversify, and…oh yeah. Diversify! You'd think everyone would follow this advice, but you'd be wrong. Remember: Don't hold an inordinate amount of stock in your company or industry. And aim for between ten and twenty stocks in your portfolio.
  2. Being impatient. Another rule that non-day trading investors tend to forget is to take the long view. In other words, patience tends to reward investors more so than reacting to every hiccup, feint, and swerve shown by the market. Resign yourself to the fact that you will probably have a bad day, week, month, or year - but panicking and making knee-jerk changes will hurt you in the long run.
  3. Placing more importance on your losses than your gains. This one is actually a perfectly natural thing to do. Studies have shown that individuals tend to react more strongly to a loss of a certain amount of money than when they gain the same amount. This makes us "loss averse" investors, which isn't always a good thing. Be sure assign the same weight to your portfolio's ups as you do its downs.
  4. Placing too much importance on weird market events. This one could also be called "Letting the specter of the 2008 market crash color your every investing decision." Though that was an unusual event, it's not likely to happen again anytime soon (especially across all sectors). So avoid the temptation to yank your money out at the first sign of bad economic news.
  5. Ignoring "small" fees. You know all those tiny little expense ratios on your investments? Pay attention to them. Even a small difference can suck out thousands from your portfolio over a lifetime. So monitor your expense ratios constantly, do a few background checks on how much you're actually paying in fees, and don't be afraid to change funds or investment houses to keep costs low.
  6. Thinking that you can consistently beat the market. It's okay to trade on a hunch once in a blue moon. But unless you're a data-intensive expert in a given type of fund or investment, you should probably stick to portfolios that follow market averages. The best investors are the ones who realize that they don't know everything
  7. Getting greedy. Sure, a 15% to 20% rate of return sounds fabulous. If it were easy and risk-free, everyone would be doing it. But more often than not, you're shooting yourself in the foot if you try to achieve an ROI greater than the market average. That's because there's no such thing as a sure thing.

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About the Guest Author
Chris Martin is a freelance writer who writes about topics ranging from auto insurance to consumer finance to home improvement.