There are a few investing blunders that many people make — mistakes that are detrimental to their overall investment strategies. As you put together your investment portfolio, whether it be within your 401(k) or in a brokerage account, make sure to avoid these Deadly Sins of Investing.
1. Not taking your goals into account
If retirement is 20 years away, and you have your 401(k) sitting in cash or treasury bonds, you may not reach your goals. Similarly, if you plan to buy a house in six months, and you have that money invested in the stock market, you might lose a chunk of your down payment and not be able to recover the loss in time to buy a home on schedule. Make sure that the investments in your account — and their risk levels — reflect what you are trying to accomplish.
2. Basing your investment strategy on someone else’s risk tolerance
You wouldn’t buy shoes based on someone else’s shoe size, would you? So why would you copy your friend’s portfolio holdings without taking into account your own goals and risk tolerance?
3. Making too many short-term moves with your long-term money
We all know this person. She’s the one talking about her latest stock purchase at get-togethers.
While buying and selling stock can be fun, it should be done with money that is not intended for your long-term goals. If you are really set on short-term buying and selling, open an account that is just for “play money” and leave the rest of your “serious money” in well diversified, long-term investments.
4. Having too much tied up in one investment
Have you ever talked to someone who has over 50% of what they own tied up in his company’s stock? I’ve heard plenty of horror stories of people who had the majority of their 401(k) funds invested in their companies — notably, Enron at the time of its collapse.
If your income depends on your paycheck from a company, make sure your investments don’t also depend too heavily on the same company. A good rule of thumb is to have no more than 20% of your investments in any one company — and ideally closer to 10% or less.
5. Not knowing what you’re actually invested in
You don’t need to know the exact stocks in the balanced mutual fund that you have in your 401(k), but you should have a general idea of what is in your portfolio. If you use a financial advisor to manage assets, and you have no idea what they’re doing with your money, ask him or her to break it down for you in simple terms. If you’re not sure what a mutual fund actually is, make sure to read Investing So Your Money Grows.
6. Basing investment decisions on the news
You can’t glean what’s going to happen in the market based on what you read in the news. It can’t tell you that the stock market is really going to tank tomorrow, and that you should sell everything and go to cash.
In this scenario, that money could have had another 20-30 years to grow and more than make up for the loss you would have incurred by waiting it out. Unless you are a CFA and follow markets for a living, leave the market timing to the pros.
7. Not saving enough
This is a big one. If you aren’t saving enough, it is going to be really hard to get to where you need to be.
For example, say you make $60,000 a year. If you save 10%, or $500 a month, for the next 30 years, with an average 9% return, you’d have around $900,000 to work with come retirement.
If you saved 15% and made the same return for the same time period, you’d end up with around $1.34 million. That’s a big difference! Make sure you know if you’re saving enough. Try out this Marketwatch Retirement Planner to get a general idea of whether or not you’re on track for retirement.
If you’re not, make a plan to bump up your savings. You don’t have to go from 10% to 15% all at once; you can set up an automatic increase of 1% every 6 months until you get there.