The world of investing can, at times, feel over-saturated with experts expounding lists of investing tips. Just last week InvestorPlace put out its own 5 investing rules you need to follow. But just as important as seeking what steps to take is knowing what moves to avoid.
Last week, investing whiz and FusionIQ CEO Barry Ritholtz posted a list of common mistakes that many investors make. We’ll take a quick look at Ritholtz’s findings, but the full piece — including his suggestions for avoiding these mistakes — can be read here.
- High fees are a drag on returns: Even fees that seem low begin to add up over time, especially when you’re dealing with hedge funds, which also charge a percentage on your profit. You’ll often find that these services aren’t even worth the extra cost.
- Reaching for yield: Chasing yield often leads to investing practices a rational trader would never condone. Invest safely, and most likely you’ll ultimately see more money.
- You (and your behavior) are your own worst enemy: There is nothing more dangerous than an emotional investor, but the danger he poses is only to himself. Resist the knee-jerk reaction to buy high and sell low.
- Mutual funds vs. exchange-traded funds: Many people remain in mutual funds, even when similar ETFs with much lower fees are available.
- Asset allocation matters more than stock picking: It might be tempting to try to eke out a fast dollar by finding that magic stock or timing the market perfectly, but many investors miss out just by not having the right mix of stocks and bonds.
- Passive vs. active management: Not only will active managers cost you more, but their attempts to beat their benchmark — an exceedingly difficult task — more often than not actually lead to your money underperforming.
- Not understanding the long cycle: Many investors fail to understand whether they’re investing during a secular bull market or a secular bear market, which can lead to a poor portfolio balance.
- Cognitive errors: It’s a sad evolutionary fact — humans just aren’t wired for investing! Knowing the ways your own brain will mislead you is just as important as managing your emotions.
- Confusing past performance with future potential: Many investors look at a stock and see that it already has gone up 50%, 75%, even 100% — and mistakenly assume that means more growth is on the way.
- When paying fees, get what you pay for: Many people pay professionals to take care of their money — but most are doing so for things they could do themselves.