Halloween is right around the corner
– time for Shrek, Buzz Lightyear, Cinderella and all their
friends to make their annual requests for candy. These
trick-or-treaters probably amuse more than frighten you – but can
the same be said for your investment strategy? The fact is that
many of us make some pretty
”
scary” investment decisions.
Halloween is right around the corner – time for Shrek, Buzz Lightyear, Cinderella and all their friends to make their annual requests for candy. These trick-or-treaters probably amuse more than frighten you – but can the same be said for your investment strategy? The fact is that many of us make some pretty “scary” investment decisions. Here are a few of these frightful moves to avoid:
Investing too conservatively or aggressively – There’s no one “right” way to invest. If you are naturally more of a risk-taker, you might tend to invest more aggressively – so you’d be interested in growth stocks that offer potentially big returns, along with significant volatility. On the other hand, if you typically avoid taking chances in your life, you might be drawn toward “safer” investments, such as bonds or certificates of deposit – investments that offer protection of your principal, but little in the way of growth. But to be a successful investor, you’ll have to leave your “comfort zone” and avoid being too aggressive or too
conservative.
Not diversifying your portfolio – By diversifying your investment dollars across a range of vehicles – stocks, bonds, government securities, real estate, money market accounts, etc. – you can help protect yourself against massive downturns that primarily affect one type of asset. Also, the better diversified you are, the more different chances for success you’ll get.
Chasing after “hot” stocks – By the time you invest in a “hot” stock, it may already be cooling off. And, in any case, this stock might not be suitable for your individual needs. It might not help you diversify your holdings, and it might carry more risk than you’d like.
Reacting to short-term events – Every single day, the newspaper is full of big events: an increase in interest rates, an election, a war, a corporate scandal – the list goes on and on. If you made an investment decision in reaction to each of these events, you’d never be able to follow a consistent, long-term strategy that’s tailored to your needs and goals. As an investor, try to look past the headlines – in many cases, they’ll fade away quickly enough.
Forgetting about the impact of taxes – Taxes can erode the “real” rate of return of an investment. Consequently, you’ll want to become a “tax-smart” investor. Take full advantage of tax-deferred vehicles, such as your 401(k) or a traditional IRA, or tax-free investments, such as a Roth IRA or some types of municipal bonds. And try to avoid frequent buying and selling; if you hold your stocks for at least a year, you’ll be assessed a lower capital gains rate when you do sell.
Not learning from your mistakes – In the late 1990s, investors went wild over “dot-com” stocks, driving prices higher and higher. But when many of these companies showed little – if any – earnings, the prices plunged and the technology “bubble” burst. Yet, in 2004, we’re again seeing investors being drawn to some types of technology stocks whose earnings do not justify their price. Everyone makes investment mistakes, but the best investors learn from them – and they don’t repeat them.
By staying away from these frightening investment moves, you can make strong progress toward your financial goals – and that’s not a terrifying prospect at all.
