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13 Dumb Investing Moves and How to Avoid Them

Angela Colley

Watch the video of ’13 Dumb Investing Moves and How to Avoid Them’ on MoneyTalksNews.com.

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.

But just saving is often not enough to cover a long-term crisis — and it’s certainly not enough to cover the ever-rising cost of living comfortably in retirement. Putting your money in a 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. Here are some of the most costly mistakes investors make:

1. Not investing

The biggest mistake would-be investors and savers make is not investing.

Don’t wait for that raise, inheritance or lottery win. Start today, right now, with whatever you can. Consider this: If you can save $150 a month — that’s only about $5 a day — for 30 years and earn 10 percent on it, you’ll end up with $343,391. That’s enough to change your life and the lives of those you love.

If you can’t find $5, start tracking your expenses to 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-based 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 invested 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 research and other information available online for free, not to mention in library books. There’s no reason to be uninformed.

3. Being impatient

In “The 10 Commandments of Wealth and Happiness,” Money Talks News founder Stacy Johnson offers 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 believe I bought it in 2002 or 2003 — my split-adjusted price is around $1 per share. Lately, Apple has been trading at $140 to $150 per share. Had I been listening to CNBC or some other outlet promoting constant trading, I almost certainly wouldn’t still own it.

In other words, don’t act rashly.

4. Not diversifying

Investing in stocks involves what’s known as market risk: If the entire market tanks, your stocks probably will as well. It also involves 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, including companies of different sizes and companies in different sectors.

Can’t afford to own many companies’ stocks? That’s what mutual funds are for. A mutual fund allows you to own a slice of dozens — even hundreds — of companies.

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 — like stock options and commodities futures — as Stacy Johnson details in “Ask Stacy: Should I Invest in Stock Options?

There’s nothing wrong with these types of investments if you’re an expert or exceedingly lucky. But if they are all you’re going to invest in, you’re really just 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 deer in headlights, unwilling to take even a measured amount of risk. Instead, they keep their savings in insured bank accounts, earning less than 1 percent.

Putting all your money in insured accounts will ensure you never lose anything. But it will 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 from stable, thoughtful investor to wild speculator overnight. 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 and find a few financial journalists or others you trust. Then tune out the rest.

9. Following the herd

Billionaire investor Warren Buffett has said, “Be fearful when others are greedy; be greedy when others are fearful.”

Many of the stocks Stacy owns were purchased when the Dow was below 7,000 and nobody was buying — an example of being greedy when others are fearful.

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-term game. You should hold onto stocks long enough to see a good return, but if you don’t know when to get out that could cost you big. Companies can go bankrupt, for example.

So while you shouldn’t obsess over your investments, you shouldn’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.

This arguably played a role in what happened during the housing bubble and the dot-com bubble that preceded it. Being in the right place at the right time isn’t the same as being smart.

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 wiped out the savings of many people who were on the verge of retirement. That shouldn’t have happened, because they shouldn’t have had that much exposure to stocks so close to retirement. Check out “5 Simple Ways to Invest Your Retirement Savings” for tips on avoiding such a fate.

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? That would be a commissioned salesperson more interested in their financial success than yours. The right help? A fee-based planner with the right blend of education, credentials and experience. Check out “How to Choose the Perfect Financial Adviser” for tips.

So, did I leave anything out? If you’ve made mistakes or have advice that could help others, let us hear from you by commenting below on our Facebook page.

This article was originally published on MoneyTalksNews.com as '13 Dumb Investing Moves and How to Avoid Them'.

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