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InvestorGuide University > Subject: Investing > Watch Out for These Mistakes

Investing Mistakes to Avoid
Watch Out for These Mistakes
by Roger Wohlner (Write for us!)
(Click on the links within the article to get definition of that word)

Investing is a gradual process - purchasing investments and selling others as the years go by. After a period of years, this can result in a mixture of investments that don't fit your overall investment strategy. Thus, periodically review your portfolio, watching out for these mistakes:

You don't use an asset allocation strategy.
Many investors select individual investments over the years, not considering the overall make-up of their portfolio. Add up all your investments and calculate what portion is invested in each investment category. The basic categories are stocks, bonds, and cash, but each category also has many subcategories. Since subcategories can have different risk levels (i.e., blue chip and growth stocks have very different risk levels), review subcategories as well. Assess your current allocation and determine whether it fits your personal situation.
You have too many investments that aren't adding diversification to your portfolio.
Diversification helps reduce the volatility in your portfolio, since various investments will respond differently to economic events and market factors. Yet it's common for investors to keep adding investments to their portfolio that are similar in nature. This does not add much in the way of diversification, while making the portfolio more difficult to monitor. Before adding an investment to your portfolio, make sure it will further diversify your investments. (Keep in mind that diversification does not ensure a profit or protect against losses in a declining market.)
Your portfolio's return is lower than benchmark returns.
While everyone likes to think their portfolio is beating the market averages, many investors simply aren't sure. Review the return of each component in your portfolio, comparing it to a relevant benchmark. While you may not want to sell an investment that has underperformed for a year or two, at least monitor closely any investments that significantly underperform their benchmarks. Next, calculate the overall rate of return for your portfolio and compare it to a relevant benchmark. Include all your investments - those in taxable accounts and in your retirement accounts. Also be sure to compare your actual return to the return you targeted when setting up your investment program. If you aren't achieving your targeted return, you risk not reaching your financial goals. Now honestly assess how well your portfolio is performing. Are major changes needed to get it back in shape?
You trade too frequently without adequate research.
In this fast-paced investment world, it's tempting to trade often based simply on other people's recommendations. Yet, besides the tax and trading costs associated with frequent trades, several studies have shown that frequent traders often underperform those who trade less frequently. Instead, purchase investments you are willing to hold for the long term.
You don't consider income taxes when investing.
Ordinary income taxes on short-term capital gains and interest can go as high as 35%, while long-term capital gains and dividend income are taxed at rates not exceeding 15% (5% if you are in the 10% or 15% tax brackets). Using strategies that defer income for as long as possible can make a substantial difference in the ultimate size of your portfolio. Some strategies to consider include utilizing tax-deferred investment vehicles (such as 401(k) plans and individual retirement accounts), minimizing portfolio turnover, selling investments with losses to offset gains, and placing assets generating ordinary income or that you want to trade frequently in your tax-deferred accounts.