Whether you have been investing for years or just starting out, chances are you are going to make some mistakes. Unfortunately for tons of investors, the problem is they don’t learn from those mistakes.
“Good investing is counterintuitive,” says Jeremey Kisner, senior wealth adviser at Surevest Wealth Management. “If you follow what feels good you are usually going to do the wrong thing.”
From investing on emotion to chasing past returns, here’s a look at the top six mistakes money managers say investors of all stripes make far too often and should avoid in the New Year.
Making less than the markets
Nobody sets out to have a less-than-stellar return on their investments but often that happens and investors have themselves to blame. According to Brad Bernstein, senior vice president at UBS, over the last 20 years the S&P 500 averaged a 9.2% return per year yet the average stock fund investor only did 5%. The reason: they buy and sell at the wrong time, he says. “When the market goes up they feel safe, they buy after it goes up and when the market goes down they get scared and sell after it goes down,” he says. Instead of investing on emotion, Bernstein says you have to understand how the markets work and have a plan that you stick with.
Not giving your strategy enough time to play out
There’s no question we live in an ADD world but acting like that with your investments can cost you a lot of money. According to Kisner many investors don’t give their strategies enough time to play out and usually regret it in the end. Take the real estate market as an example. Many people bought into the market after the crash thinking it was the bottom but real estate values continued to decline for a couple of years after that. A lot of people gave up and lost out when the market eventually started to rebound. “People want instant gratification but these things take years to play out,” says Kisner.
Going in blind without a plan
Blame it on an urgent stock tip or an impulsive personality but for a multitude of reasons many people start investing without a plan. That’s ok if you have money to throw away but if you are aim is to grow your nest egg than it behooves you to create a plan, says Tom Ruggie, president of Edge 401K Funds. “If a sound strategy is developed, it keeps the investor engaged and reduces the likelihood of them making poor emotional decisions,” says Ruggie. “It is hard to drive decisions without a process, and working with an advisor or coach helps determine the best strategy for the individual.”
Chasing past performance
When it comes to investing often people spend their time chasing past performance instead of looking out for new opportunities. If the best place to be in 2014 was U.S. large capitalization stocks chances are a slew of investors will be putting their money in the same place in 2015. That may seem logical, but Bernstein says it’s something you should avoid doing. “The biggest mistake in the late 90s was no one wanted to own small and mid-cap stocks,” says Bernstein. “What happened was for the next six years large cap was the worst place to be and small and mid-cap dramatically outperformed.”
Ignoring costs and fees
Investing isn’t free but the amount you pay can vary from one place to the next. Unfortunately investors overlook those costs and focus solely on their returns, which Jeff Reeves, editor at InvestorPlace.com and author of “The Frugal Investor’s Guide to Finding Great Stocks” says is one of the biggest mistakes they make. “There are two ways to increase your return by 0.5% annually – the first is to chase outperformance in riskier investments, and the second is to cut your overall costs by 0.5%,” says Reeves. “Though half a percentage point doesn’t sound like a lot, consider that $10,000 saved annually at a 5% rate of return will generate almost $700,000… but $10,000 saved annually at a 5.5% rate of return generates almost $770,000. That’s a big chunk of change that comes from just a small difference in total returns.”
Not rebalancing and diversifying holdings
One of the worst things an investor can do is have all of their holdings in one company, sector or asset class. That will almost guarantee if something goes south so will all their money. A better strategy, say investment professionals, is to diversify and reallocate when one area gets over-weighted. Take the S&P 500. According to Reeves it has doubled in the last five years or so, which means if you started with a 50/50 split with 50% of your money in stocks and 50% in bond it may now look more like a 70/30 split. “Diversification and rebalancing prevents a big move from taking a big chunk out of your portfolio,” says Reeves. “Long-term investors should always make reallocation of their assets an annual event to prevent one sector or even one stock from becoming too much of their total nest egg.”