As a financial advisor, I have helped hundreds of clients with their finances over the course of my career. Clients often arrive worried having already made a misstep or two, but I’ve noticed some common investing mistakes that can easily be avoided.
I’m happy to share the top 10 investment mistakes to avoid so you can set yourself up for success for years to come.
1. Not having a proper emergency savings account.
You may be wondering, what does an emergency fund have to do with investing? Well, if you face a significant and unexpected expense, such as a hospital stay or damage to your home, not having at least three to six months’ worth of your average monthly household expenses saved up in cash will likely require you to take on credit card debt. very expensive or request the withdrawal of funds from investment accounts.
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Doing the latter can trigger significant taxes and penalties and greatly dent your quest to meet future investment goals.
2. Not investing enough for the future in your 20s and 30s.
It can be difficult to save and invest enough in the early years of your career. Housing, student debt, and a lower salary can mean you have fewer funds to save within an IRA and/or 401(k). However, through elegant expense management and investing in your skills (i.e., your human capital), you can actually accrue significant amounts each year.
In doing so, you can harness the power of composition. This is the ability of an asset to generate earnings which, when reinvested or kept invested in the parent asset, will generate additional earnings.
3. Don’t increase your maximum pension contributions over time.
With fairly common regularity, the IRS will increase the maximum amounts that can be invested within retirement investment accounts. In fact, these limits have recently been increased starting from 2023 (opens in a new tab). Starting next year, the amount an individual can contribute to a 401(k), 403(b), and most 457 plans increases to $22,500, up from $20,500 in 2022.
IRA contributions can exceed $6,500, a $500 increase over the current $6,000 annual limit.
Failing to remember to adjust your annual contribution amounts to take advantage of these increases means you’re missing out on the ability to build up even larger amounts to build up over time.
4. Believing that owning more than a few stocks is adequately diversified.
There has been a lot of talk recently (with good reason) about the importance of developing a properly diversified recession-resistant portfolio. But how do you know if you’re properly diversified? Simply buying more than a few stocks and/or mutual funds isn’t enough if they’re all generally moving in the same direction at the same time (that is, they’re all highly correlated with each other).
The hallmark of an adequately diversified portfolio is one that has stocks that are invested in various asset classes and geographies that are uncorrelated to each other.
As the saying goes, avoid putting all your eggs in one basket.
5. Hunting for recent performance.
It’s understandable to look at how a particular investment vehicle has performed in the past as a guide to whether you should invest in it now. However, there’s a reason the adage “past performance is no guarantee of future results” has resonated for so long.
The investment landscape changes over time, sometimes very quickly and unexpectedly.
Instead, spend time understanding the future prospects of an investment and how it fits into your overall portfolio.
6. Try to consistently time the market.
Simply put, trying to time the market is a crazy errand. No human or algorithm has been proven to correctly pick individual winners based on short-term market swings over a long-term time horizon, so you shouldn’t even try to do that.
Attempting to do so could also trigger commissions and trading fees, as well as take a toll on your mental health.
Creating a long-term plan with an investment strategy to match will consistently yield positive results, while market timing will inevitably backfire at some point.
7. Get financial advice from friends or colleagues.
It is human nature to want to imitate the behaviors of successful people. However, it is also common for people to highlight their successes and conveniently ignore their failures.
Avoid following the water cooler chatter about investing.
Instead, work with a certified financial planner to help you build an appropriate portfolio that aligns with your personal goals.
8. Not acknowledging your true appetite for investment risk.
Too often, people focus on the potential benefits of investing a certain way without properly recognizing the risks of investing. When it comes to an investment stock, look at the standard deviation which measures the overall level of expected volatility.
If the media frenzy about a particular asset is keeping you up at night, it’s time to reevaluate your portfolio for risk assessment.
9. Failure to implement asset tracking.
Not all investment account types are taxed equally. Current tax law mandates that gains that occur within each of the three major account types (tax-deferred, taxable, and after-tax) are all taxed differently.
Since future tax rates are unknown with absolute certainty, a wise tax mitigation strategy is asset location, meaning you should open and fund at least one account within each category over time. Specifically, a brokerage account (which is taxable), a retirement account such as a traditional IRA (tax-deferred), and a Roth IRA (after-tax).
10. Compare yourself with others.
Investing is a behavior pursued with the aim of increasing one’s wealth. Don’t let this pursuit serve as the main driver of your overall happiness. Don’t beat yourself up because you haven’t invested in the same way as others. Errors will occur.
Working with a professional wealth advisor is a great way to help define what happiness truly means to you and how you can enjoy many well-lived todays and tomorrows.
When you are just starting out in investing, it is a given that you will make some of these mistakes. But over time, the goal is to learn, grow with your team of trusted advisors, and build a diversified portfolio that grows your wealth.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC-registered investment adviser based in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, rates and services, is available at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities trades or to provide personalized investment advice. The information provided does not constitute legal, tax or accounting advice. It is advisable to seek the advice of a qualified lawyer and accountant.
This article was written by and presents the opinions of our contributing consultant, not Kiplinger’s editorial team. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).