Successful investing isn't always about how much money you make but how much you keep. Keeping losses to a minimum allows your assets the potential to grow over time through compounding. Unfortunately, some investors make decisions that cause their portfolios to lose value or that hinder growth of their assets.
4 Errors to Avoid When Investing
Putting all your eggs in one basket
Everyone knows this old adage. There is a danger investing all your assets in only one fund or security. If that lone investment tanks, your portfolio could be scrambled.
Instead, consider diversification. While this strategy doesn’t ensure a profit or guarantee you won’t lose money, you can better manage risk by spreading your assets among different investments and asset classes – stocks, bonds and cash instruments.
As some assets fall in value, others may rise or hold steady and help offset the losses.
Trying to time the market
Some investors stay fully invested in stock funds while the stock market is rising, then jump quickly into money market* or cash equivalents just before stock values begin to fall. For this strategy to work, investors must know precisely when to get out of stocks and precisely when to buy back into them – always.
If you build a portfolio that meets your long-term goals and considers your risk tolerance, you can stay invested – even when the market is volatile.
Buying last year’s winners
Don’t expect last year’s top-performing funds or stocks to be successful year after year. Too many factors can affect stock and bond funds in any given year, such as economic health, interest rates, consumer confidence and political issues.
While there’s no guarantee history will repeat itself, don’t ignore a past-season winner that has steady performance and a fund manager with a consistently solid track record.
Thinking short term
Investing for the short term simply may not give your investments time to potentially grow. This is particularly important if your goal is long-term – such as funding your retirement or college education for your kids. For long-term growth, many investment professionals say stocks are a portfolio essential.
There may be periods when their prices fall and your portfolio loses value. But five decades of research show that stocks have consistently recovered from declines and have outperformed all other major asset classes.
Investing is not simple, but by staying alert and avoiding common investing errors, you increase your potential for long-term investment growth.