Many people think investing is hard, but it doesn’t have to be. If you can avoid the needless mistakes that so many investors make, then you’ll find yourself far ahead of the crowd. The following five errors might sound ridiculous to you, but many people still make them — and pay the price. Stay on guard against these situations, and you’ll end up with far better investing results in the long run.
1. Buying high-commission investment products
The first thing all investors must do is to recognize when someone is asking them to pay unnecessary costs. Despite the rise of low-cost investment options, you can still find professionals who concentrate on selling high-commission products. Mutual funds that have sales loads, annuities and insurance products with substantial surrender charges, and specialty investments such as privately offered real estate investment trusts often carry larger-than-necessary up-front costs. These put investors in an immediate hole, with their assets having to perform well just to cover the expenses of purchasing them. You’re better off avoiding high-commission products and looking for the low-cost alternatives that are readily available.
2. Buying highly promoted penny stocks
Nearly everyone who visits investment websites has seen ads featuring tiny companies promising to be the next big investment. These investments are called penny stocksbecause they typically have share prices of less than $1. What many investors don’t realize is that what appear to be news stories about these companies are actually paid promotional materials by professional entities that specialize in raising awareness of penny stocks. Adding to the temptation is that many penny stocks do in fact enjoy big runs higher, but they typically fall back to earth once reality hits and the initial hype dies down. Trying to ride that wave has wiped out many investors, and you should instead focus on better-known companies with proven prospects.
3. Cashing out your retirement plan account at work
Saving for retirement is smart, and many workers make the good choice of contributing to a 401(k) plan at work. Yet the mistake they’ll often make comes at the tail end of their employment relationship, cashing out their retirement plan account when they switch jobs. Doing so incurs penalties and immediate taxation of the proceeds, and it also causes you to miss out on the potential future investment returns of the money in your 401(k). The better move is to roll that money over into your new employer’s 401(k) plan or into a personal IRA, where it can continue to grow on a tax-deferred basis and avoids the taxes and penalties associated with cashing out.
4. Keeping too much money out of the market
Being too conservative with investing is one of the biggest mistakes most investors make. Time is the greatest ally for investors, and the younger you are, the more you can afford to take greater risks by investing more aggressively. Yet even young investors just starting out often keep more of their money in cash than is ideal. At current interest rates, even high-yield savings accounts don’t earn enough interest to keep up with inflation, which means that you’re actually losing purchasing power on the cash you keep uninvested. Having some cash on hand is smart to cover immediate short-term needs, but for long-term goals, remaining fully invested is the best way to make your money grow as fast as it can.
5. Panic-selling at the first sign of trouble
Emotions are the enemy of investors, and nearly everyone who invests can point to an initial experience in which he or she made an emotionally driven decision that turned out to be exactly the wrong move. One of the biggest fears that new investors have is that they’ll put money into stocks at the worst possible time, and if a downturn does happen, it can feed that fear and make it painful to hold onto positions and keep investing. Yet investors have to stay focused on the long-term track record of stocks in generating better returns than most other assets. If you can put emotions aside, it’ll go a long way toward improving your results.
No one likes to make silly mistakes, but if you’re not ready for them, it can be harder to avoid these five pitfalls than you’d think. By keeping these potential problems in mind, you’ll be better able to steer clear and preserve your portfolio in the long run.