11/11/2013 5:00 PM ET|
5 ways to avoid rookie investing mistakes
Making smart investment decisions early on can mean better returns and fewer headaches in retirement.
Creating an investment portfolio can be a daunting task, especially if you're counting on it to provide essential income later in life. Making the right initial decisions can mean better results and less worry later.
A common initial investment is through an employer-sponsored 401k plan, which has tax advantages and may include a contribution match from your employer. But regardless of how your investing journey begins, the following guidelines can help you start on the right foot and avoid some of the most common investor oversights.
1. Check up on your financial adviser's background
It's not uncommon to ask for help before investing for the first time. That guidance could come from a close friend or family member, but if you choose to work with a financial professional, make sure you check out his or her background before moving forward.
Lori Schock, director of the Security Exchange Commission's office of investor education and advocacy, says you should ask to see the advisor's licensure documents and then independently verify the information. "Whether they had problems with regulators in the past, or whether they've had their own financial issues in the past, it's all publicly available," she says.
Avoid potentially biased or vague company websites and utilize government sources instead, such as the investment professional background check tool at investor.gov. "If you end up going off information from another area, you could end of working with a con artist," Schock says. "That's the worst-case scenario of what could happen. You hook up with a fraudster and essentially put your life savings at risk."
All legitimate investing professionals are required to be licensed with either the Security and Exchange Commission or your state's securities regulator, so if you can't find the professional in either of those areas, acknowledge that red flag and hold onto your wallet.
Also, be sure to ask about the fees financial advisors charge. If the costs are too high, examine your employer's retirement plan because it may provide access to a financial advisor at a lower cost.
2. Diversify your portfolio
Diversification within an investment portfolio is crucial for both security and profitability. By filling your portfolio with varied securities that have low correlations, which are numerical measures of how two investments move together, you can achieve a more efficient risk and return trade-off.
But don't get carried away. "If a 401k gives people 10 investment choices, a large percentage of people would simply put 10 percent into each choice and not have any rhyme or reason for the mix," says Casey Mervine, a Charles Schwab financial consultant.
On the other hand, also be wary of allocating your assets to a small number of investments. "Look at the folks who were employees at Enron who not only had their outside investments and stock but also their 401ks invested in Enron stock, and so then they lost their job, their outside money and their retirement plan," Schock says. Diversify your portfolio by allocating investments among different assets classes, such as stocks, bonds and cash.
"Another good rule of thumb is to watch how much you own of one particular asset or especially one area of stock," Schock says. "Diversify your products with different maturity dates and investing horizons based on how long that money needs to grow." Investing in a handful of mutual funds that represent different company sizes, domestic and international stocks, and different types of bonds can also help offset losses if one area of the market begins to struggle more than another. To maintain a diverse portfolio, conduct routine checkups and rebalance as necessary.
3. Read the fine print
If you understand the fees associated with investing, you can better understand how to maximize profitability. "Too often we see people not considering how costs, fees or even taxes will impact their returns down the road," Mervine says.
For example, mutual fund annual fees are expressed as expense ratios, which represent what it costs a company to operate the fund. They vary by the type of fund, but on average, the expense ratio for an actively managed stock mutual fund is approximately 1.43 percent per year, according to the Investment Company Institute.
It's important for new investors to understand how fees can affect your their returns over time. "For example, if you invested $10,000 in a product with a 10 percent annual return before expenses and annual operating expenses of 1.5 percent, after 20 years you would have about $49,725," according to the U.S. Security and Exchange Commission's website. "But if the investment had expenses of 0.5 percent, you would end up with $60,858 -- an 18 percent difference."
When it comes to fees, it pays to do extra research and ask questions. If you are working with an advisor, some of your inquiries could include: "What are the total fees required to purchase, maintain and sell this investment?" "What are the ongoing fees to manage my account?" Or for a mutual fund, "How much will I be charged to buy or sell shares?" You can also check the expense ratio of a mutual fund by searching its prospectus.
4. Make your portfolio your own
Some investors tend to seek immediate gratification and follow trends. However, according to Guy Weinhold, a financial advisor for Edward Jones, the best approach for you and your portfolio will match your individual goals and build slowly over time.
Avoiding a "one size fits all" investing approach is important because "no two people have the exact same financial situation," he says.
Taking advice from fellow investors can be helpful, but proceed with caution. "A lot of people tend to directly follow advice from friends and it often doesn't work out so well," Mervine says. "You may be given an investment or given a tip, but until you take the time to understand why you are in an investment and learn what the investment is likely to do for you, you won't learn as much if someone told you something and you just blindly acted."
5. Don't let emotions get the best of you or your money
"The number one problem I think all investors face at some point is of an emotional component," Weinhold says. "When you let your emotions brew and make bad decisions based on the news or crisis of the day instead of focusing on your goals, that's when you can find yourself in trouble."
Combat this instinct by focusing on long-term plans. Creating a personal checklist or working with an advisor can help you avoid making knee-jerk decisions based on fear or greed. "New investors often want to see growth right away and fail to invest for the long run," Mervine says. "Investors will be better off to wait it out, be patient and educate themselves on all the ways that they can diversify."
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When making the decision to become an investor, most people understand they know little or nothing about investing, so they seek out a professional advisor. My suggestion is to avoid any professional advisor who want to put an investor into mutual funds and charge a high selling fee (some times up to 5%) to do it. These professional advisors will also sometimes sell an investor a mutual fund which also charges a high annual fee. Anyone, even an novice investor, can invest into mutual funds without a professional advisor. I highly recommend anyone wishing to invest to obtain information from a LOW COST MUTUAL FUND COMPANY and select one of their INDEX FUNDS. Most of these mutual fund companies do not charge a selling fee (or a redemption fee) and the annual fee is usually less than 3/4 of 1%. There are several low cost mutual fund companies I could recommend, but do your own research, it will help educate you about investing. To research, read a couple of financial magazines from your local newsstands. You will find there are at least two very large low cost mutual fund companies which offer several WELL DIVERSIFIED index funds with which you will be very happy.
This article, like so many we see, seems stuck on paper investments. There are so many other investment opportunities out there if we just stop to think about it. If you are a "consumer", and you-all are, you are already an "investor". Much of this is simply a state-of-mind and perspective. Be creative in your investment possibilities. I know people who collect everything from model cars to antique machinery. I know people who invest in agricultural real -estate, and others in rental properties. Yet others dabble in commodities of one sort or another; and, in different manners.
One guy buys "beef" futures, while the next guy buys live cattle and puts them out on shares. I know people who purchase real-estate to develop it for profit, and others who buy it to just sit on it and let it appreciate in a strong real-estate climate. There are "seed-money" groups who provide start-up money for new businesses. The list goes on and on. The important thing is that if at all possible, do your investing in something you understand, so you can recognize changes in markets and trends. Fancy terms, but don't be intimidated by them. When you really think about it and come to understand the nuances of what it means to you, you will have half the battle won. Good luck with your adventure:<)
Want to know how to make one million dollars in the stock market? Well... first you start with one million dollars.
Want to make money in investing?
1. First, fire your financial advisor
2. Secondly, educate yourself about investing.
Study the following books: Four Pillars of Investing; How to Make Money In stocks, etc
3. Research the stocks and make an informed commitment
4. Monitor your investments daily
5. For maximal gain-----you must have guts to invest in high risk, high yield stocks/bonds
6. For minimum loss you must spread your stocks/bonds.
7. Buy when it's going up (not when it is low); sell when it is going down
8. If your stock is losing, sell before it loses 10% of purchase price.
9. Start small; persevere.
If your employer matches your 401(k) contribution in whole or in part, the match can be (and often is) in company stock which you're NOT allowed to cash out or swap for anything else — you have to keep the stock until you take your required distributions.
I had 188k when GW Bush took office. On the day he left, I had lost my house, all the growth stocks, no job, got a DUI and lost my drivers license in all the states thanks to the national driver registry, moved out of Florida and was living in a field in Corpus Christ Texas. How is that for a big loss?
Wow. This article is full of important information. I'm already twitching and shaking like Rodney Dangerfield trying to shake a do-do down his pants leg!
I`m sitting on a lot of cash because there`s a lot of great stocks if you know the
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The final week of August represented one of the quietest stretches for the stock market so far this year. The first four sessions of the week produced the ... More
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