Piedmont Financial Advisors

by Brent Perry, CFP

Investing for your future can be challenging. There is a lot of financial information and advice on the television, internet, and in magazines which can often be overwhelming.  Because individuals are often inundated with financial advice they may make mistakes that can be costly to their long-term financial health.  Below are six common investment mistakes and how to avoid them.

1. Buying individual stocks. Most investors don’t have the time or persistence to keep up with the rapidly changing business environment in which an individual company operates.  Avoid buying individual company stocks based on tips or recommendations.  Instead, when looking at investments, focus on building a diversified portfolio of mutual funds that is appropriate for your age, goals, and individual situation.
2. Not investing at all. Not saving and investing means that you are not taking advantage of market growth and compounding interest that long term investing provides.  While market performance can vary widely from year to year, history has shown that investing in a diversified portfolio provides growth over the long term.  Individuals that make a monthly commitment to saving and investing are positioning themselves for financial stability later in life.
3. Timing the market. Market timing is when you buy or sell assets by attempting to predict future price movements.  While there may be the occasional success with market timing, the vast majority of individuals using this strategy experience losses.  Avoid reactionary investing based on hype surrounding economic and industry news.
4. Not setting goals and tracking progress. By not setting goals and tracking progress, individuals run the risk of not having enough money for retirement.  Setting realistic financial goals, such as the percent of income to save per month, helps to make goals easier to achieve.  Goals should be written and progress should be reviewed at least once per year.
5. Lack of investment diversification. Generally this means owning a few individual stocks or having a large exposure to a specific sector.  Proper diversification means owning many different types of stocks and bonds so one isn’t over exposed to a particular company or industry. This strategy helps to reduce risk.
6. Withdrawing money from a 401(k) or IRA before retirement. Removing money from these types of accounts before retirement means you not only have to pay income taxes and a penalty, you reduce the savings you would have accumulated if the money was left in the account. Money you put in a retirement account should never be accessed unless you are truly in dire-straights, such as potential loss of your home or major family illness.  As a general rule once your money is in a retirement account, assume it is not available to spend until retirement.

Specific investment and saving strategies are unique to each individual and vary depending on each person’s situation. Individuals that take the time to identify financial goals and are disciplined about investing and saving in the short-term have a greater likelihood of long-term financial success.