8 Biggest Mistakes Investors Make
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In the stock market, as in life, nothing is certain. The vast opportunities for creating wealth by investing come with plenty of risks, such as the 2008-2009 stock market collapse and plenty of sharp contractions since.
Mistakes? Investor, behold thyself. Here are the most common investing screw-ups, along with advice on how to avoid them.
At Kiplinger, we believe everyone, whether you're just beginning a career or already enjoying retirement, can earn solid returns in the stock market. The keys are starting early, building a balanced portfolio, making regular contributions over the long term and, above all, recognizing the pitfalls. Beware costly missteps and you can profit handsomely for years to come.
By the editors of Kiplinger's Personal Finance See my bio, plus links to all my recent stories.Freaking Out in Market Drops
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Wall Street can be a perilous place when the bear is loose. This is not new. Three centuries ago, when scientist Isaac Newton lost a fortune in the "South Seas" stock collapse, he lamented: "I can calculate the movement of the stars, but not the madness of men." Too bad he wasn't around to read the advice of Kiplinger columnist James Glassman, looking back on a more recent debacle: the 2008-09 market meltdown. The Dow lost half its value in less than a year. Millions of investors saw billions of dollars in assets disappear. Just as Sir Isaac had done, many investors pulled out at the worst possible timethe bottom.
Yet five years from that 2009 market bottom, the Dow is up roughly 10,000 points to a record 16,000-plus. Patient investors were the winners. Notes Glassman: " Making money in the stock market is hard not because finding great companies is difficult but because the best and easiest-to-understand strategy for winning is so difficult to adhere to. That strategy can be described in three words: buy and hold ."
For more, read 5 Tactics That Help Patient Investors Prosper .
Failing to Rebalance Your Portfolio Regularly
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Every investor is subject to the whims of the market. Here's one way to profit from the inevitable ups and downs. Let's say your portfolio is made up of mutual funds. At the end of each year (or even quarterly), consider how much you have in each fund. Then target new money to the funds that have done poorly. It might seem counterintuitive, but rebalancing keeps your portfolio diversified by preventing your wealth from becoming concentrated in a small number of investments.
Better yet, rebalance your portfolio by selling some of the winning funds and putting the proceeds into the laggards, so each fund ends up with the same percentage of money it started with the year or quarter before. This disciplined approach to investing helps ensure that you're buying lower and selling higher, which certainly beats the buy-high-sell-low trap that snares many investors. " Rebalancing takes gutsit's hard to reward losersbut it works ," says Kiplinger.com columnist Steven Goldberg.
For more, read A Plan for Achieving Your Goals.
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