Whether it’s for building a retirement corpus or for putting excess cash flow to work, you must guard against some major investment mistakes that a good number of rookies, as well as experienced investors, make. In fact, good investment decisions are rarely about excellent investments and mostly about avoiding these pitfalls.
Here are 6 of them that you must watch out for:
One automatically feels inclined to invest more aggressively during the upward stock market movements. In fact, research reveals that investors are increasingly putting their funds into investments that have been performing consistently well in recent times. Unfortunately, the same research also reveals that majority of those investments end up delivering below-par returns later.
There’s no way you can exactly predict what the stock market has in store in the near future. But one thing is for sure–being heavily invested into stocks exposes an investor to a much higher risk of facing negative consequences. These negative consequences could be in the form of a huge loss during times of need. Even if there’s no urgent need, a huge loss can make you apprehensive about stock market investments and negatively impact your wealth creation ability.
Hence, you must re-evaluate all your investments and figure out if you are turning into a very aggressive investor. A good indicator is the possibility of losing around 50% of your money in stocks in a particular year. It may be a good idea to take things a little slow.
On the other hand, there are a large number of investors who are extremely fearful of the stock market. A recently carried out study revealed that no more than 55% of all US adults were invested into stocks. What’s surprising is that there are even less young investors.
Although stock markets are full of risk when investing into them for the short-term, they are the best wealth creation medium if you are prepared to stay invested for longer. In fact, you can never become financially independent unless you learn how to tap into the returns offered by the stock market.
And if you look closely you’ll observe that the stock market has indeed always performed well over the long term. However, as also mentioned earlier, there are no guarantees when it comes to the future returns. But the odds would definitely be stacked in your favor if your investment horizon is long enough.
Continuing investing even when in debt
‘Cheap debt’ is a phrase that’s commonly thrown around by a large number of financial experts. However, it must be noted that the term isn’t applicable to credit cards. It makes no sense to continue investing when you’re living off your credit card! It’s always better to get rid of the card debt first and then think about matters related to investments.
On the other hand, continuing investing may be a better idea when you’re making mortgage payments or are repaying a student loan, as the possible returns from the investment may offset the cost of your debt.
On the whole, your priority should be to first offload all your debt and only then set aside any funds for investments.
Overpaying for investments
The easiest way to predict which way an investment will go in the future is by looking at its price. Research has revealed that the cost of investment is one of the best indicators of its future performance. The less the cost of investing in a certain financial product, the more will be its possible returns in future.
Unfortunately, many investors are oblivious to the amounts they’re forced to pay for their investments. This is primarily because most of these fees are hidden. For instance, trading fees, management fees, taxes, etc. are either charged long after their incurrence or are deducted directly from the investor’s account. The investor may not know the actual cost of their investment decisions. As a result, it becomes very easy for the financial companies to overcharge for their services. Every extra dollar paid for an investment is an opportunity lost for earning more.
It’s usually the sexier aspects of investments that garner most of the media attention. But if you look at them closely, you’ll notice that there’s nothing that holds more importance than the percentage of your savings. Increasing your savings from 10% to 20% can reduce your working life by almost 15 years. Increase it to 25% and you’d have possibly slashed another 10 years. No investment decision can have the same kind of impact.
However, going by the statistics provided by the Federal Reserve Bank of St. Louis, an average American doesn’t save more than 5.4% of his/her monthly income. Despite assuming that every bit of that 5.4% gets allocated to a retirement plan, it translates into a working career extending to 66 years.
Hence, ensure that you’re either saving ample amounts already or have a solid plan for it in the future.
Avoiding savings automation
It’s highly unlikely that you’re saving enough unless you have automated the savings process. Automating savings has two huge benefits: it makes sure that you meet your savings target consistently every month and it does away with the stress of worrying about the other expenses. You’ll know that your savings have been taken care of.
Saving for retirement can be automated using a 401(k) or any other company plan via payroll deductions. You can even automate savings by linking your IRA or any other investment account directly to your checking account. No matter what method you use, such automation will make sure that you never deviate from your savings target in any given month.