Lessons Not Learned

A bakerM-Fs dozen of mistakes investors continue to make

Your Money

August 08, 2004|By Gregory Karp

Investing mistakes M-y mostly born of ego, emotion and ignorance M-y are costing investors big time. And investment advisers say they see the same errors made year in and year out. The first step in avoiding common blunders is knowing what they are. The worst mistakes include:

Buying single stocks risks multiple errors

ItM-Fs a lot easier to make mistakes when investing in individual shares of stock. Here are some common bonehead errors:

Investing in individual stocks at all

Unless you really know what youM-Fre doing and can stomach tying your future to the fate of a few individual companies, choose mutual funds instead. You get the chance for great returns with much less risk.

Buying low-priced stocks

Stocks priced under $10 are cheap for a reason. Many investing professionals wonM-Ft touch them, so why would you? Owning 10 shares of a loser at $5 is not better than owning one share of a winner at $50.

Having no exit strategy

Investors spend a lot of effort researching a stock to buy, yet many have no plan for selling it. Maybe you sell when it reaches a price target. Or maybe you hold it until something drastic happens to company management, its products or its industry. Have a plan.

Loading up on company stock in your retirement plan

Your greatest asset, your income, already comes from this company. DonM-Ft sink most of your investments M-y no more than 10 percent, tops M-y in the company, too, no matter how confident you are of its future. Ask Enron employees how well that works.

M-y Gregory Karp

Lacking an investment blueprint

Not having a comprehensive plan for how youM-Fll invest is like setting out for a cross-country trip without a map. YouM-Fll take a lot of unnecessary detours along the way and may never get to where you want to be. Through your own research or professional advice, think strategically about what you want to do with your money.

Investing in what you donM-Ft understand

If you canM-Ft explain what an option or annuity is, you have no business putting your money into such an investment. Educate yourself on money basics M-y at least know exactly what a mutual fund is M-y before you invest. There are scores of books and Internet sites for investing beginners.

Not investing at all

DonM-Ft be so paralyzed by ignorance that you stash all your money in bank accounts or CDs that wonM-Ft even keep pace with inflation. You might think youM-Fre playing it safe, but youM-Fll be losing spending power, year after year. ItM-Fs especially harmful to younger investors.

Holding on to a bad investment

ItM-Fs usually foolish to hope that a bad investment will somehow turn itself around. The thing to do is sell it and put the money in a good investment. But studies show we suffer much more pain from a $1,000 loss, for example, than we receive pleasure from a $1,000 gain. So, we refuse to sell at a loss. Instead, we sit on bad investments, hoping to get even.

Buying last yearM-Fs hot mutual

ItM-Fs a fact that last yearM-Fs screaming performers will probably be this yearM-Fs yawners. Evaluate a mutual fund based on its holdings, expenses, manager and long-term performance, not last yearM-Fs investment return.

Not diversifying your holdings

Different types of investments perform better at different times M-y sometimes bonds are hot, sometimes domestic growth stocks, other times international stocks. Spreading your money around ensures less volatility and usually better overall returns.

By the same token, donM-Ft buy so many investments that you canM-Ft keep track of which one is supposed to be doing what.

Trying to time the market

Professional money managers with decades of experience, an abundance of knowledge and legions of research analysts canM-Ft predict financial market movements. How egotistical do you have to be to think you can? Results from amateur market- timers are predictable: They buy high, sell low.

Paying a mutual fund load for nothing in return

There are thousands of mutual funds to choose from. Unless youM-Fre paying a load M-y a sales charge M-y in return for financial advice, find a duplicate noload fund. More broadly, pay attention to the builtin expenses of any investment. High fees and expenses can devour your returns.

Not contributing enough to a 401(k)

Many companies will give you free money in your retirement account. All you have to do is contribute a little, too. Because the money comes out before taxes, youM-Fll barely feel the effect of contributing, say, 6 percent to your 401(k).

Investing with family members

Investing should be treated like a business, not a family affair. ItM-Fs not worth a family rift if an investment tanks. Consider it a gift, not an investment, when you give your brother-in-law money for a real estate scheme.

Acting on a hot tip

Putting your money into a company featured on a one-minute segment on CNBC is silly. Put down the magazine cover story on M-t10 Hottest Mutual FundsM-v and pick up a finance textbook.

Ignoring your investments

Even if you set up a good array of investments, the components grow at different rates, and your allocations get out of whack. You need to monitor your holdings and shift money around so they continue to match your strategy.

M-tInvestingM-v in consumer goods

DonM-Ft rationalize purchases of high-end computers or luxury cars with the word M-tinvesting.M-v Those items lose value from the moment you buy them M-y a guaranteed losing investment.

Gregory Karp is a personal finance writer for The Morning Call, Allentown, Pa., a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com

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