Provided by Bankrate.com
Everyone knows the secret to investment success is to buy low and sell high. The problem is most of us lack clairvoyance.
We weigh in on some of the most common mistakes investors make, and while it's easy to see that chasing hot stocks -- the most frequently cited mistake -- would be an exercise in futility, there are other pitfalls to watch out for on the road to retirement.
There are never any guarantees when investing, but avoiding these seven missteps will better your chances of success.
Mismatching Investment With Goal
Need that money for retirement in the next couple years? Don't put it in a hot emerging-markets fund.
Consider when you'll need access to your money. This will help you avoid unnecessary transaction fees, penalties and risk.
For some goals, such as paying for college, it may make sense to use a mix of investments, says Gail MarksJarvis, author of "Saving for Retirement (Without Living Like a Pauper or Winning the Lottery)."
"If you are saving for college and your child is within three years of going to college, you've still got seven years until that last year of college," she says.
So while the bulk of short-term college savings should probably be very safe in CDs or short-term bonds or a high-yielding savings account, maybe some of that money could be invested in stocks. "Just remember the rule of thumb," she says, "that money you'll need within five years shouldn't be in stocks."
Fees may sound minuscule at 1 percent or 2 percent, but they can gouge your returns by thousands of dollars.
While all mutual funds have expense ratios, which cover investment advisory, administrative services and other operating costs, some are much higher than others.
To complicate matters, some funds impose sales charges or loads. Load funds are only available through an investment adviser or broker who is compensated by sales commissions.
Picking no-load funds is one way to save money on fees. Instead of going through a broker, call a mutual fund company directly to purchase a fund.
While it might be worth paying a load if you don't have the time or inclination to make your own investment choices, just remember, it's hard, even for a skilled money manager, to make up for those extra fees.
Failing to Strategize
It's time to pick funds from your 401(k) lineup. All you do is pick the ones that performed the best, right?
Wrong. Before you research the investment, there are a couple of things to think about. First, plan your investment strategy by determining what asset classes work best for you, and then pick the investments that are best in these categories.
Next, make sure you're comparing apples to apples. Some funds don't make as much money as others -- by design. A bond fund cannot compete with a stock fund because of the nature of their respective holdings. However, different types of funds serve different purposes. The bond fund can have a stabilizing effect on one's portfolio.
Misreading the Label
You bought a bunch of different funds -- so that means you're diversified, right? Not necessarily. You don't want to find out that you're overexposed to a particular market sector after it hits a rough patch. Luckily, staying out of this trap is a matter of learning to read the label.
Understanding the different types of asset classes will help you strategize. Different asset classes do better at different times. Bonds may do well while the stock market is suffering and large-cap firms may weather tough times better than spunkier small caps. Boring bonds will never match stocks in a hot market and small caps may be better poised to take off like a shot than their larger, lumbering counterparts.
Psssst. Wanna hear a good stock tip?
No, we're not going to tell you about the next Google. We're going to tell you to do your homework. Here's what to look for when researching funds:
* Type of fund (large-cap growth, small-cap value, etc.).
* How long the manager has been there.
* How much the fund costs (expense ratio).
* Minimum investment required.
* Portfolio holdings (list of securities).
* Performance information -- remember, past performance does not guarantee future return.
Ignoring Your Portfolio
Buy and hold can be a smart strategy, but buy and ignore won't serve you in the long run.
Without reviewing your holdings, you won't know if your portfolio remains balanced, and you won't shift your holdings to achieve retirement goals or help you cope with changing life events.
The experts differ on how often you need to do a portfolio review. Some recommend doing so on a quarterly or semiannual basis. Others meet three times a year with clients. But all agree that it's important to review your holdings at least once a year, whether they're within a company-sponsored retirement plan or outside of one.
The market is ricocheting all over the place, and when the boss isn't paying attention, you're online buying and selling in a frenzied attempt to dodge the bullets.
Richard Salmen, a Certified Financial Planner and national president of the Financial Planning Association, describes the all-too-common trap emotionally driven investors fall into: "Most people don't earn what the market earns. They invest too heavily in too risky investments that are doing well, then drop out when they go back down. They take all their money out of tech stocks, for example, put the money into bonds, then put money back in stocks after prices have gone back up."
His prescription is to invest a little bit of money from every paycheck, diversify, then leave it alone.
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