10 Investment Mistakes to Avoid

Investors take great care to approach their investments by considering economic conditions, studying selections, and considering alternatives, but there are untold ways things can go wrong.  Here are just 10:

Leave your politics at the door!

The first of these common mistakes is looking at your portfolio through the lens of your politics. It’s not that world events or public policy legislation are irrelevant, but in our ideologically tribal society, political priorities can too often lead investors astray. 

We routinely imagine others fully agree with our take on the state of affairs and public debate. Very often these are not direct and immediate influences that drive investment returns. Granted, corporate tax increases will slow corporate profitability and dramatic government spending is initially an economic stimulative. In most instances, though, we routinely see investors make bad decisions because of their political preferences. 

Whether you are rooting for the blue team or the red team, many investors decide to exit equity markets fully in anticipation of election results, or because they think the country is headed in the wrong direction under the opposition party. This leads to another common mistake.

Trying to Time the Market

More often than not, when investors run from the market, they don’t time it well. When investors typically seek to avoid risk, it is because they have already been hurt by declining markets. Flying in the face of the adage to “buy low and sell high,” those running from risk most often do exactly the opposite. Even those who do arrange for a timely exit to the market have great trouble knowing when to reenter and invest again. 

Taking Too Much Risk

Inevitably, investors love taking on risk when markets are rising, but want no risk when markets are falling. We all feel this way, but it’s just not realistic.  

Take a hard look at your risk temperament. For many investors, it’s been a long run with generally upward trending markets. Even in the face of the declines brought on by the global pandemic, investment markets rebounded dramatically even within a year. Many investors have not endured a prolonged multi-year market decline in quite a while, and thus have become complacent to expect favorable returns.  

Equity markets routinely decline 10% within a year, and 20% is well within the normal expectations. Look at your asset allocation to consider what level of declines are you really willing to endure. If your positioned for too much risk for your comfort, these are reasonable times to reposition. With equity markets at or near all-time highs, it is a perfect time to reallocate toward your current tolerance for risk.  

Insufficient Liquidity 

Having reserves can be challenging. Nobody wants to miss out on opportunity, but there are times when liquidity can be good – whether for the opportunity to put it to work in attractive investment opportunities, or to enable the endurance of declines because of sufficient resources to get one from a trough back to a peak. Some like lines of credit in place of liquidity, but debt comes with a cost.  

Investing Without a Financial Planning Context

Understanding your portfolio in the context of the whole financial picture, or a financial plan, can help you keep your eyes on the prize and not lose perspective. Most investors are, at least in part, long-term investors for some of their portfolio. Having a financial plan can help you keep track of what your near-term needs might be, confirm those resources are available, and permit long-term investments to stay the course for the long-term. 

It can also be helpful to remember when to and not to take on more risk using a thoughtful approach to considering future cash flow needs, planned expenses, or other priorities that can help you plan when and how to invest. A good professional can help provide this context and give you a sounding board along the way.

Not Investing Enough and Consistently

As a society, we seem not to invest sufficiently. There are various rules of thumb as to amounts, and everyone’s resources and spending needs may vary. 

• For those focused on financial security and financial freedom, recurring systematic investing is essential. 
• Investing sooner is better than later to benefit from the power of compounding, but remember that it is never too late to start and anything is better than nothing. 
• Don’t leave free money on the table. By that I mean, if your employer offers a match in a retirement plan, at least make sure you maximize that match, otherwise you are giving up a portion of your compensation voluntarily. No one should return a portion of their paycheck to their employer if they are entitled to that compensation.  

Trying to Get Rich Quick

Chasing speculative risks undermines too many investors. Often those who are “behind” in their investing feel pressure to go big or go home. In baseball terms, instead of going for singles and doubles to get on base, some investors start swinging for the fences looking for home runs.  

Speculative investing should be done with funds you’re willing to lose entirely. Very often these are far more volatile selections and although they may win big, they can also disappoint even bigger. 

Just this year we’ve heard so many stories about GameStop and the meme stocks, crypto investing, and SPACs. Before that, it was pot stocks, and no doubt there will be new ideas and opportunities ahead. It is exciting to have the possibilities of astronomical returns. It may well be the same impulses that cause one to play the lottery, or to gamble. Differentiate how much you are investing for the long run and how much you are willing to risk with speculative ventures. We generally encourage those who can afford to lose if things don’t go well to keep 95% of their investments in less speculative holdings and limit their speculative choices to 5% or under.      

Over Concentration

One of the most basic rules of investing is to be diversified. It still surprises me how often investors fail to abide by this most basic investing tenet. Reportedly, Benjamin Graham, famed investor and mentor of Warren Buffett, described minimum diversification as ten stocks in ten industries. 

In today’s low or no cost trading world, with online access, ease of use, and the nearly instantaneous access to information, you may be able to extend that even farther. Even so, you should not invest more than 10% in one company. We generally encourage investors to not exceed 5% in a single company they love and in which they see great opportunity. 

Whatever your limits are, set parameters and live by some rules, even when it may be a little uncomfortable trimming a position you love. With time and success, individual positions need to be trimmed, lest they take on more and more risk in a given portfolio.  

The Tax Tail

We’ve all heard it, “don’t let the tax tail wag the dog!” And yet, it is quite often what investors do. Despite the desire to manage risk, investors very often avoid taking the tax cost to manage risk and so they inadvertently, year-after-year, take on increasing risk due to concentration.  

There can be too much of a good thing! These risks can represent volatility, but they can also be risks to wealth if that company later falters. There are numerous means of mitigating tax implications. Whether through tax loss harvesting, use of stock options, or other methods, investors should look to time these tax decisions in a manner that is palatable but does not ignore a potentially growing problem.  

Not Having Rules to Live By

Whether Hammurabi’s code or television’s NCIS’s Jethro Gibbs, people have craved rules to live by. In investing, there is no magic formula, but we all benefit from having some guideposts – rules to prevent us from straying too far from that which we believe to be true.  

Without clear parameters around why you buy and/or why you sell, you’re left rudderless and impulsive. Impulsiveness and uncertainty rarely serve investors well. There is no shortage of resources to opine on “the right way” to invest, but you should start building and revising your investment building blocks. These may be different for different investors and may be very different between investment types. Whenever in doubt, seek professional help.