Markets & Strategies

5 Investing Mistakes to Avoid

Informed strategies and long-term planning are the best ways to avoid these investing mistakes.

by Mark Tosczak - June 19, 2017

Most of us aren’t Warren Buffett, the billionaire investing legend nicknamed the “Oracle of Omaha” for his business and financial acumen.

But you don’t need to be an investing guru to save enough for retirement and other financial goals. If you can stay focused on a long-term plan and avoid some common investing mistakes, you likely will have a better shot at reaching your goals.

Tracie McMillion, Head of Global Asset Allocation for Wells Fargo Investment Institute, details five things investors often get wrong and offers guidance on how to avoid them through informed strategies and long-term planning.

Mistake 1: Not matching investments with investment goals

Before you start buying (or selling) stocks, bonds, mutual funds, or other securities, the first thing you should do is consider your goals, McMillion says. Are you saving for retirement? Do you need to build a college fund for your kids? Identifying how much you want to accumulate in savings and from investments is a good place to start.

“Talk to your investment professional about your near-term, intermediate, and long-term goals,” McMillion says. “They can help you structure a portfolio that’s more likely to help you meet those goals while minimizing risks.”

Mistake 2: Not understanding risk

Risk is a key principle in investing, McMillion says, and many investors don’t really understand it. Risk can be defined as the potential to permanently lose money. Some investments are riskier than others, but every financial decision involves risk.

“Oftentimes, you’ll see someone who thinks they’re investing in an asset that has low risk and high return,” she says. “There’s really no such thing.”

Higher returns are what investors are potentially paid in exchange for investing in a riskier asset. Risk is inescapable, so the key is to understand your risk tolerance and manage the risk you are taking, which should be based on your long-term financial goals.

Risk is inescapable, so the key is to understand your risk tolerance and manage the risk you are taking.

Mistake 3: Not investing enough

“Twenty-somethings frequently tell us they don’t have enough money to save,” McMillion says. “If they’re employed with a company that offers a retirement plan, they should start investing as soon as possible.”

If you don’t have access to a retirement savings plan through work, then McMillion suggests socking away $50 a week — or whatever amount is possible — in an IRA. Even small contributions can grow substantially over the 40-plus years a typical 20-something has until retirement.

Mistake 4: Being too concentrated

Diversity within your portfolio is a foundational principle of modern investing. But McMillion notes that it’s common to see investors who have too much of their money in a single asset, such as an employer’s stock, or a single asset class, such as bonds.

“Owning concentrated positions can increase or decrease your wealth more quickly,” McMillion warns. “Be prepared for a permanent capital loss if you’re too concentrated.”

Mistake 5: Trying to time the market

Unless you are a real oracle (from Omaha or somewhere else), you shouldn’t try timing the market.

“When do you get in, when do you get out, and when do you get back in?” McMillion asks hypothetically. “Once markets start falling, investors might sell, only to see the markets go back to new highs.”

Instead of trying to time investments based on guesses or predictions, investors should develop a sensible long-term plan that includes a diversified portfolio, McMillion says.

Mark Tosczak is an experienced business writer and marketing consultant based in North Carolina.

Image created from iStock

Additional Resources

Periods of volatility can bring opportunities as well as risks. Use these tips to prepare for the market’s ups and downs.

Risk Factors

All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

Diversification does not guarantee profit or protect against loss in declining markets.

Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Disclosures

Wells Fargo Investment Institute, Inc. (“WFII”) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company.

Opinions represent WFII’s opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. WFII does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.