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Tue October 23, 2012
Financial pitfalls to avoid
There are few guarantees in the world of finance. Every investment involves risk. But one thing is guaranteed: everyone makes mistakes.
On this week's Money Matters, financial commentator Greg Heberlein warns us away from some of the most common errors.
The most critical factor in successful investing is controlling emotions
Individuals tend to buy at the top and sell at the bottom – the reverse of what one should do.
To control that impulse, invest for the long term. If you’re suddenly gripped by a desire to buy or sell, ponder it, sleep on it, talk to others about it. A day or two, even a week or two, won’t make a difference over the long haul. It might even save you from some losses.
In addition, spread money across various forms of investment.
If you divide your money among stocks, bonds and cash, you can get some protection from big swings.
Some would mention commodities. Bah! Commodities are extremely dangerous and have no business in a long-time portfolio.
In younger years, a stock-heavy approach is acceptable, but consider more bonds and cash as you age.
If an investment looks risky, don’t bet the house on it
Invest only what you can afford to lose.
In any single stock or bond, show restraint. Stay at or below 5% of your investing assets. Broad mutual funds are okay, but avoid specialty funds, unless they fall in that below-5% class you’re willing to lose.
Some investors pay a lot for advice, or for investments with hefty fees. But you can learn a lot of that advice on your own. There are plenty of resources online and at the library. If clarity still eludes you, then consider paying a professional for guidance.
The most inexpensive investing forms are no-commission index funds. Managed mutual funds, where a human is selecting stocks or bonds, tend to penalize you 1 to 2 percent a year. As your resources grow, that can cost you a lot.
Don't give up if you make a mistake
It's easy to get discouraged when you lose money. Learn where you went wrong, and then get back in the game.