6 deadly investing mistakes |
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For example, if you decide to spend $500 each month
on purchasing shares, you will be able to buy only a few shares
if the price is $100 per share. However, if the price goes down
to $50 the next month, the same dollar investment will buy twice
as many shares.
"By making regular and consistent purchases over a longer period of time, your cost basis -- the total amount you pay
for a security -- is spread out. That provides a cushion against normal market price fluctuations," says Francis.
"Dollar-cost averaging is a time-proven and effective way to minimize the effects of emotion in financial management,"
says Kimmel.
Mistake No. 4: Trying to time the market
"It's better to invest regularly, without regard for the general condition of the economy or the direction of the stock market," says
Darrell J. Canby, CPA/CFP and president of Canby Financial Advisors, in Natick, Mass.
"Timing the market, trying to determine the best time to buy specific stocks, rarely works," he says. "You might get
lucky once in a while, but your luck isn't likely to last."
Rick Willeford, M.B.A. and CPA/CFP, in Atlanta, says
simply, "Market timing and day trading are for suckers. The financial
press makes money from advertising, and they do that by keeping
you breathlessly chasing the latest tip or fad. They make money
whether you win or lose."
Waiting for stocks to hit the "bottom" before you buy or hit the "top" before you sell has long since proven to be a loser's
game for investors. Select the stocks or mutual funds that you buy only on the basis of sound fundamentals.
Mistake No. 5: Not maintaining an appropriate asset allocation
If there is one point that virtually all financial advisers agree on, it's the critical need for you to maintain an asset allocation suitable to
your personal circumstances. Asset
allocation refers to the process of dividing your investable assets among stocks, bonds and cash.
The diversification mix that is right for you at a given point in your life will depend on such things as your age and your
tolerance for risk.
If your retirement is years away, most experts recommend relatively heavy investments in equities, 60 percent or more of your
total portfolio. "However, if your time horizon is less than three years," says Certified Financial Planner Greg Womack from Edmond, Okla.,
"stay in fixed investments like CDs, short-term bonds and money markets."
Once you allocate your assets in the manner right for your circumstances, it's important to rebalance at least once a year.
As the price of equities goes up or down, the ratio you have established will change. If the value of your equities has risen, you may
want to sell off some of them to restore your original ratios. If their value has dropped, moving more cash into equities may be appropriate.
"If your portfolio is largely within an IRA or other retirement plan, consider rebalancing every quarter," says Womack. "If
it is regular, taxable money, consider at least annually, perhaps more during extremely volatile periods. For a rebalancing strategy to work,
you must own assets that don't react the same way over differing market conditions."
Mistake No. 6: Abandoning your investment strategy
"Creating a plan such as dollar-cost averaging and sticking with it under all market conditions is the way to maximize your returns," says
Kimmel. "Human nature makes it difficult for the average investor to stick to an investment strategy unaffected by emotion. Sometimes it's
fear; sometimes it's pure greed. Either way, allowing emotions to affect your investing decisions is certain to damage your financial future."
Womack agrees.
"It's human nature to chase hot sectors that have already made a significant move," he says. "It's also natural to panic and
sell-out when everyone else is doing the same."
While it may be the natural thing to do, it's not the smart thing, according to Womack. "It's important to have an investment
strategy and stick to it. Remember: If the headlines are full of it and everyone else is doing it, you're probably too late."
There is, of course, much more to the maintenance
of an investment portfolio that may well help you sleep during these
scary investment times. However, sticking with these common-sense
fundamentals will go a long way toward achieving that end.
For more help with investing, see Bankrate's investment calculators.
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