The concept of saving for a rainy day has probably been around for as long as humans have. It’s virtually instinctive to prepare for an uncertain future by setting something aside — whether it’s extra food, a trunk of gold ingots or an emergency fund in the bank.
But just saving is often not enough to cover a long-term crisis — and is certainly not enough to cover the ever-rising cost of sending kids to college and living comfortably in retirement. This is especially true right now — with interest rates at historic lows, savings accounts grow at a glacial pace. Your bank savings account is more secure, but only marginally more profitable than stashing your money under the mattress.
Ideally, we want to make our savings work as hard for us as we do for it — through investing in the right mix of assets, hopefully without losing anything in the process. But we often fall down on that task. So, we are here to provide you a cautionary checklist of things NOT to do with your money:
1. Not investing
The biggest mistake investors and savers make is not doing it.
Don’t wait for that raise, inheritance or lottery win. Start today, right now, with whatever you can. Consider this: If you can save just $5 a day, every day, for 30 years and earn 10 percent on it, you’ll end up with $343,693. That’s enough to change your life and the lives of those you love.
And if you can’t find $5, start tracking your expenses and see where you can cut. We partner with PowerWallet, a free service that lets you set goals and automatically tells you where your money’s going. If you’re not using it or something similar, start.
2. Investing before doing your homework
When it comes to investing in risk assets like stocks, one mistake I’ve made is going on “gut instinct” and 20 minutes of internet research.
In college I decided to start investing as a way to build my retirement. Good plan. But I also decided to invest in companies I knew and liked, rather than actually understanding them. Bad plan.
When dealing with investments that can go south, don’t invest without a clue. If you’re thinking about stocks, there’s plenty of online research and information available there for free, not to mention TV shows and library books. There’s no reason to be uninformed.
3. Being impatient
In a post called “The 10 Commandments of Wealth and Happiness,” Money Talks News founder Stacy Johnson offer this advice: Live like you’re going to die tomorrow, but invest like you’re going to live forever. He also offers an example of how patience pays:
The biggest winner in my IRA is Apple. I don’t remember exactly when I bought it, but I’m guessing it was in 2002 or 2003. My split adjusted price is around $8/share: Today Apple’s trading at around $400/share, so my $1,600 investment is now north of $80,000. Had I been impatient and sold early, I would have missed out on the most profitable investment I ever made.
Stare at a newly planted tree for 24 hours, and you’ll be convinced it’s not growing. Fixate on your investments the same way, and you could miss out on a game-changer.
4. Not diversifying
There are two types of risk in stocks. The first is called market risk: If the entire market tanks, your stocks probably will as well. The other is called company risk, the risk that a specific company will do poorly.
It’s hard to eliminate market risk, but you can reduce company risk by investing in lots of companies.
For an example of diversification in action, just look at Stacy Johnson’s online stock portfolio. You’ll note the values of some stocks have more than doubled since he bought them, while others are worth less than he paid. That’s why you diversify.
Can’t afford to own a meaningful number of companies’ stocks? That’s what mutual funds are for. A mutual fund allows you to own a slice of dozens — even hundreds — of companies with an investment of as little as $50.
5. Taking too much risk
Everybody wants to double their money overnight. But if you’re always swinging for the fence, you’re going to strike out often.
Some investments are little more than gambling. Investments like options and commodities, for example, promise huge rewards, but the risk is also huge: Read “Thinking Stock Options? Think Again.”
There’s nothing wrong with the occasional flyer, but if that’s all you’re going to do, you’re not investing, you’re gambling. Go to Vegas; at least you’ll get free drinks.
6. Not taking enough risk
On the other side of the same coin, some investors stand like a deer in the headlights, unwilling to take even a measured amount of risk. Instead, they keep their savings in insured bank accounts, earning less than 1 percent and comforting themselves with Mark Twain’s expression: “I’m more concerned with the return of my money than the return on my money.”
Insured savings will ensure you never lose anything. But they’ll also ensure that the purchasing power of your savings won’t keep pace with inflation. In other words, you’ll become poorer over time.
7. Getting greedy
The first time I made money on a stock, I was hooked. I went overnight from stable, thoughtful investor to wild speculator. Thankfully, my father stepped in and convinced me to stop sprinting and start walking again. If he hadn’t, I probably would have blown my entire savings.
8. Paying too much attention
There is such a thing as information overload. Between the Internet, newspapers, magazines, and cable TV, it’s easy to get more than your fill of conflicting information. Step back, look at the big picture, find a few financial journalists or others you trust, then tune out the rest.
“If I listened to all the experts on CNBC, there’s no way I’d still own Apple today,” says Stacy. “I buy quality companies and hold onto them for long periods of time. I can go weeks — even months — without checking them.”
9. Following the herd
One of the world’s wealthiest men, Warren Buffet, said, “Be fearful when others are greedy; be greedy when others are fearful.”
Most of the stocks Stacy owns in his online portfolio were purchased when the Dow was below 7,000 and nobody was buying. His logic? “If you’re convinced the economy is going to zero, buy guns and canned goods. But if you can reasonably expect a recovery someday, invest — even if that day is a long way away, and even if it’s possible things could get worse before they get better.”
10. Holding on when you should be letting go
Stocks are best played as a long game. You should hold on long enough to see it through, but not knowing when to get out could cost you big.
In 1980, General Motors was the largest company in the world. In 2009 it went bankrupt.
Don’t obsess over your investments, but don’t ignore them either.
11. Being overconfident
The economy runs in cycles of boom and bust – when times are good, people often confuse luck with skill.
12. Failing to adjust
How you invest should change as your life changes. When you’re young, it makes sense to invest aggressively, because you have time to recoup from mistakes. As you approach retirement age, you should reduce your risk.
The Great Recession and stock market decline of 2007-2009 wiped out the savings of many on the verge of retirement. That shouldn’t have happened, because they shouldn’t have had that much exposure to stocks. Check out “A Simple Way to Invest Your Retirement Savings” for tips on how to adjust your investments over time.
13. Not seeking qualified help
While investing isn’t rocket science, if you don’t have the time or temperament, consider getting help.
The wrong help? A commissioned salesperson more interested in his financial success than yours. The right help? A fee-based planner with the right blend of education, knowledge, credentials and experience. Check out “How to Choose the Right Financial Adviser” for tips.
So, did I leave anything out? If you’ve made mistakes or have advice that could help others, let’s hear from you on our Facebook page.