Buy low and sell high. For hundreds of years, investors have sought to maximize their potential returns by following some variation of this strategy. Unfortunately, no one knows when stocks, bonds, real estate or other financial assets will go up or down in value. Otherwise, every Wall Street pundit or analyst would be sailing around the world, building a mega-mansion or otherwise enjoying the perks of a billionaire’s lifestyle!
Trying to time the market’s highs and lows is one of the common investment mistakes in my 25-plus years as a financial advisor. But it’s far from the only error that keeps investors from achieving the success they feel they deserve.
Here is a closer look at nine other mistakes.
▪ Investing without a goal. Whether you are an experienced investor or new to the world of financial assets, you should think about your personal goals. Are you saving and investing for a down payment on a house or condominium? Do you want to achieve a financially comfortable retirement or leave an estate for your heirs?
▪ Lack of understanding. Before making an investment, you should understand the characteristics of the asset you are purchasing and how it fits into your portfolio. That’s because stocks, bonds, real estate, money market funds and other assets have different characteristics. What’s appropriate for a family member or friend, might not be suited to your goals.
▪ Concentrating your assets. Putting all of your investments into one or two stocks leaves you vulnerable to a downturn in the market as well as company specific risk. On the other hand, holding nothing but bonds, money market funds or certificates of deposit means your savings may not be able to keep up with inflation. That’s why diversification is an important strategy for long-term investors. A good financial advisor can help you construct a portfolio with different types of assets that can balance those risks and potential returns.
▪ Falling for a fraud. Be wary of anyone offering you a financial product that sounds too good to be true. Many con artists prey on an individual’s greed, claiming they can double or triple your money – only to disappear with your initial funds.
▪ Having unrealistic expectations. If you want to build a portfolio with the potential to deliver a high return, you need to consider the risks associated with that investment.
▪ Expecting past trends to continue. A good financial advisor will tell you that past performance is no guarantee of future returns. However, many investors react emotionally to market momentum. If their stocks have gone up for five years in a row, they expect a positive performance this year as well.
▪ Panicking in a market downturn. If the Dow Jones Industrial Average falls hundreds of points in day, do you frantically try to sell your shares? If so, you may be locking in those losses, and not giving the stock market time to recover. Unless you need immediate cash, you should consider a wait-and-see strategy – particularly if you are investing for a retirement that is still many years away.
Another option would be to look at the downturn as a buying opportunity, and purchase more shares while they are “on sale” at a discounted price.
▪ Worrying about loss of principal. With a diversified portfolio, some assets are likely to go up in value each year, while others decline. As a result, the principal balance in your portfolio will fluctuate every year. Remember that you haven’t made or lost any money until you actually sell those assets. Until then, you only need to consider the impact of your capital gains or losses on your income tax returns.
▪ Overlooking fees and costs. Some financial products carry higher fees than others, and you need to understand those underlying costs, as well as the potential returns. Also, be sure to discuss fees and compensation before engaging a financial advisor. That’s the best way to avoid surprises and be sure the advisor’s interests are aligned with your own goals.
Andrew Menachem, CIMA®, is a wealth adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS.