Seven Common Investing Mistakes

Mistake #1 - Lack of Diversification

A properly allocated investment portfolio should have some of the parts performing worse than others at all times - by design. If your entire portfolio is performing well, or poorly, at the same time, you do not have a portfolio, you have a bet and you should never gamble with your wealth.

Mistake #2 - Greed or "The Fear of Missing Out"

In the late 1990s, many people abandoned proper investment allocations to become fully invested in aggressive growth stocks, after the stock market had risen quickly for several years. Today, the same thing is happening with real estate.

Mistake #3 - Panic

Panic is driven by the belief that you must sell your investments now, before they become worthless. Even though with everything else in life we recognize that the lower the price, the greater the value, with investments we seek to avoid value. If the price of an investment has risen sharply (and therefore the value has dropped), we tend to want to own it. If the price of an investment has dropped, we tend to want to sell it.

Mistake #4 - Leverage

Leverage refers to the borrowing of money to increase the amount of an investment we can own. Though in theory an argument can be made to leverage an investment for greater gain, this is nearly always used in combination with #1, #2, and #5, and usually with disastrous results.

Mistake #5 - Speculating

This is when people are no longer investing, but rather gambling. At the height of the tech stock/dot-com bubble, people were buying shares of stocks in companies that were literally no more than an idea. Several had no revenues at all, and many had business plans that had no goal of ever becoming profitable! Today's speculators are buying real estate that has yet to begin construction. This is similar to #2.

Mistake #6 - Investing for Yield

The conventional wisdom for retirees of past generations was to invest your money in fixed income investments that paid interest, and then to live off the yield. Usually, these investments did not appreciate in value, while the cost of living continued to rise. With interest rates lower than any time since the 1950s, it makes more sense to invest for total return (yield plus appreciation), and to proportionately withdraw a percentage of the portfolio to meet your income needs.

Mistake #7 - Making Investment Decisions Based on Tax Consequences

Minimizing taxes paid on your investments is an important idea, but taxes should not be your primary guide. In the late 1990s, many speculators (see #5) used the tax consequences of selling stocks with substantial appreciation as a reason to not sell and remain underdiversified. A few years later, many refused to sell those same stock positions, but the new reason was that they did not need any more losses!