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Wednesday, 1 September 2010

10 Investment Mistakes to Avoid

by Jennifer Saranow Schultz

Jerry Miccolis, co-author of “Asset Allocation for Dummies” and chief investment officer at the wealth advisory company Brinton Eaton in New Jersey, shared his list of 10 mistakes investors should avoid.

Let us know in the comments section below what you would add to the list.

1.) Overlooking the importance of asset allocation: According to Mr. Miccolis, getting asset allocation right is the building block of investing successfully. Many investors, however, skip this step and instead build their portfolio by haphazardly buying securities they like.

2.) Confusing diversification with asset allocation: Asset allocation goes beyond simple diversification. According to Mr. Miccolis, asset allocation involves picking asset classes (think stocks and bonds) and subclasses/sectors that do not move in synch and then putting the right proportions of each in your portfolio. A portfolio with all stock investments, for instance, probably is not properly allocated.

3.) Neglecting to rebalance regularly: After you set up your initial asset allocation, you need to make sure to keep those allocations on target over time because some asset classes will grow faster than others.

4.) Favoring short-term needs over long-term goals: Rather than focus on short-term goals, invest based on thinking about your long-term goals, income expectations and risk tolerance.

5.) Letting your emotions control you: In these volatile times, it is important to stick with your long-term plan so you do not fall victim to greed and anxiety.

6.) Getting addicted to the financial media: Paying attention to financial news 24-7, according to Mr. Miccolis, will just increase your anxiety, since what the market does in a single day does not matter in the long run.

7.) Chasing performance: Buying the latest hot stock or sector is like “driving a car by looking in the rear view mirror,” Mr. Miccolis said in a statement. Generally, by the time you know it is hot, it is old news and there is not much profit left in it.

8.) Trying to outsmart the market: Studies have shown that active management underperforms passive management in the long term.

9.) Disregarding tax implications while investing: “Common mistakes,” according to Mr. Miccolis, “include putting annuities in an I.R.A., putting tax-inefficient investments like REITs in a taxable account, failing to harvest tax losses and not taking advantage of lower tax rates for long-term capital gains.”

10.) Allowing caution to supersede the reality of inflation: Safe, low-return investments like money funds, C.D.’s and Treasury securities will not keep up with inflation over the long haul. “For most people, inflation is their biggest financial threat over their lifetimes, not what the markets happen to be doing this year,” Mr. Miccolis said.

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