Let's face it. Nobody really knows which investments are going to be sure-fire winners. Even the savviest financial gurus tell horror stories about seemingly reasonable ventures that inexplicably went south.
But like dating, part of the appeal of investing is the thrill of the hunt. When you find the right partner, the rewards can be substantial. However, you're also likely to get your heart broken a time or two along the way.
With love and money, you need to follow your head, as well as your heart. You need to think carefully about your wants and needs, and seek counsel from people who know more than you do. You also need to be willing to commit for the long-term and not turn tail at the first hint of difficulty. And if you insist on having an ill-considered fling just for fun, make certain that you won't be totally devastated when it all comes crashing down.
Are we still talking about investing? Yes, of course we are. But instead of writing to Dear Abby for advice, LN sought credentialed experts who've weathered the market's ups and downs and can offer informed guidance. We recently asked them about the most common investment mistakes and how to avoid them.
One of the most frequent mistakes investors make is failing to do their homework. You can't be an expert on everything, so seek out advice from a trusted financial adviser who has a track record of success.
"People will spend more time worrying about purchasing a $500 TV than making a $10,000 investment," says David Presson, director of investments for First Bank.
Studies show that people who create a written investment plan will fare significantly better financially than those who do not – and reacting to rumors or hot tips does not constitute a plan. With that approach, you might as well try your luck in Vegas.
Consulting with a financial adviser is crucial if you are not a sophisticated investor – and very few of us are. But don't count entirely on the opinions of others, regardless of their credentials; do your own research so you can make informed decisions.
Even so, some types of investment vehicles – such as futures – are highly complex and difficult even for experts to explain. It is generally not a good idea to invest in something you don't understand.
Another frequent mistake is the failure to diversify. Experts recommend that you make sure your portfolio isn't weighted too heavily in one specific area.
"The first step is to determine what your mix of stocks and bonds should be," explains David Ott, founder of Acropolis Investment Management.
An old rule of thumb is that you should subtract your age from 100, and that's the percentage of your portfolio that you should keep in stocks. Using that formula, a 40-year-old should keep 60 percent of his or her portfolio in stocks – while a 70-year-old should only invest 30 percent.
The reason? Stocks offer a potentially greater return than bonds, but they also can be volatile. An older person is smarter to invest more conservatively and hang on to what he or she has earned than to jeopardize those savings with the sort of high-risk/high-reward opportunity that someone younger has the flexibility (though not always the resources) to pursue.
"At some point, it becomes more about preserving and protecting your assets than chasing big returns," says Lori Heise, who with her husband, Ken, founded Heise Advisory Group.
"As they approach retirement, people need to shift their mindset and dial back the amount of risk on investable assets," adds Ken Heise. "During our accumulation years, we're conditioned to want to grow, grow, grow, so it can be very hard to make this change."
Some investors, particularly those who play the stock market, also get impatient. Invest for the long haul and don't get spooked by day-to-day or week-to-week fluctuations. If your investment is fundamentally sound, stick with it.
Ott notes that the Dow has regained all the losses it suffered in the crash of 2008, offering proof that the venerable 'buy and hold' strategy, which more footloose investors once ridiculed as stodgy, has never gone out of style. As Ott puts it, "It's like a classic blue blazer."
Of course, it is tempting to try and guess how the day's news is going to impact your investments and to act accordingly – but, says Presson, "No one can consistently time the market." Anyway, he notes, the market begins to reflect current events before the headlines do. And the average investor's portfolio won't be harmed by, say, the Cypriot crisis – no matter how dire the situation may seem.
The bottom line is this: Well-run companies that offer a quality product or service will adapt to whatever the political climate may be, in Washington or elsewhere in the world. That said, all investing involves some level of risk. How much can you afford to lose without causing hardship for yourself or your family? If you’re tempted by something turbulent, are you financially and emotionally prepared if the worst-case scenario occurs? The Heises caution, "If you have enough, don't risk not having enough."
"Strike a balance that's in line with how much risk you're comfortable with," says Presson. "Set long-term goals and take a long-term approach."
Also, take into account the impact of taxes on your return rate. An IRA, for example, is tax-deferred, but on average, most funds lose 1 to 2 percent annually. And that can certainly add up.
Notes Presson, "It's not what you make – it's what you keep."