Top 10 investment mistakes — and how to avoid them
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One of the keys to long-term investment success is knowing what not to do. And so, here are the ten investing pitfalls that investors most often fall into, along with some easy guidelines to help you avoid the same mistakes.
1. Putting all your eggs into one basket. Risk-adjusted returns should be the focus for all investors. You can minimize risk with careful asset allocation and by diversifying your portfolio.
2. Putting all your money in safe, income-generating investments. Safe, income-generating instruments like Canada Savings Bonds (CSBs) and Guaranteed Investment Certificates (GICs) should not be your only investments. They help to preserve capital, but their safety is offset by their low yields. These yields will compound, but they also will be eroded by inflation.
Balancing these low-risk investments with an appropriate allocation of higher-risk instruments such as real return bonds and equities may help ensure you get the right mix of growth and risk reduction.
3. Chasing performance. All you have to do is remember the emerging markets fad in the early ’90s, followed by the tech stocks craze of the late ’90s and the busts that followed. Don’t get caught in this trap. Buy quality, and hold for the long term.
4. Procrastinating. Procrastination turns attainable goals into impossible ones. The best time to start investing was yesterday, but today is always better than tomorrow. With compounding interest, you can benefit by starting early, even with a small amount.
5. Misjudging your risk tolerance. Many investors have overly optimistic assumptions about their investments, and accept more risk than they should because of this. The longer you can stay invested, the lower your risk.
But just how long do you have to be invested? It’s not just until you retire, it’s actually longer. Your retirement assets must support you throughout retirement. It’s important to take this longer investment horizon into account so that you don’t make the opposite mistake and underestimate your risk tolerance.
In fact, one commonly cited industry statistic indicates that about 90% of the variability in the returns on your portfolio is the result of asset allocation.¹ A long time frame, asset allocation, and diversification have proven to be the most effective ways to offset much of your portfolio risk while improving returns.
7. Trying to time the market. It is very difficult to know which sector, market, or investment will outperform, and when. One solution is to buy quality securities and hold onto them.
8. Not regularly reviewing what you own. Not knowing what you own can lead to dangerous portfolio imbalances, such as being too heavily concentrated in one kind of investment, or being overly diversified. This can lead to increased risk. Be sure to review your portfolio regularly.
9. Underestimating the power of compounding, taxes, and inflation. The power of compounding should never be overlooked. Investing $10,000 at a modest 6% return would net you almost $18,000 after 10 years.
Outside of registered plans, taxes can eat away at your compounded returns. So can inflation — even the relatively low inflation we are experiencing now.
10. Not setting quantifiable, realistic goal. To help ensure success, develop and write down your short-term goals (less than 12 months), mid-range goals (one to five years), and long-range goals (more than five years). Quantify these goals and then devise a plan to attain them. If you don’t quantify your goals, you can’t assess the success of your investment strategy.
Article Disclaimer¹ "Gary P. Brinson, L. Randolph Hood, and Gilbert P. Beebower. “Determinants of Portfolio Performance”. Financial Analysts Journal. July/August 1986."
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