You know that investing is a critical part of maximizing your money and building wealth. But it’s not enough to just invest. There are some common investing mistakes along the way that can undermine your growth.
Here are some of the top investing mistakes I see – and how to avoid them:
Investing Mistakes: Timing the market
No one knows for sure how the markets are going to behave. Sure, there are trends, forecasts and expert opinions that can help you decide the best investments for your portfolio. But timing the market, and actively buying and selling to make quick money, isn’t the best approach.
One thing we do know about the markets is that passive, long-term investing pays off. Active investing, or timing the market, is often a losing game. Opt instead for investments that you plan to keep for decades, and weather the economic bumps along the way.
Be wary of any quick decisions when it comes to investing. Just like active investing results in worse returns over time, emotional investing also has its downsides.
This could include things like being swayed by the media and trends. Buying a stock because your cousin’s friend swears it’s the next big thing isn’t an investment strategy. It’s an impulse buy.
This also happens when the economy dips or is on an upswing. People buy or sell more than they usually would. But again, the best approach is to wait and see, and hang on during economic roller coasters.
There’s nothing wrong with keeping an eye on the markets and watching for new opportunities. Just make sure your decisions are based on strategy, not emotion.
Diversification is the basis of a healthy portfolio. The ingredients of your portfolio may change over time, but the idea is the same: build in some risk for growth, and some stability for security. In the simplest terms, this would look like a blend of stocks (riskier) and bonds (more stable.)
The percentage split of riskier and more stable investments will change depending on your goals, your life stage and your level of risk tolerance. Check over your portfolio once a year to make sure you still have the investment mix you want, and rebalance if anything has changed.
Paying too much in fees
Fees can really hurt your overall returns, so do your homework to make sure you’re getting the best deal.
Brokerages charge fees when you do business with them, so shop around and be aware of what each brokerage charges. You can also save money by opting for index funds and exchange-traded funds (ETFs), which charge lower fees.
Not diversifying your tax allocation
When you’re saving for retirement, consider how each account will be taxed. This matters because you could be saving or losing money depending on how, and when, you fund each account.
IRA and 401k accounts are pre-taxed, which means they will be taxed when you withdraw money. Roth accounts are post-tax, which means you won’t have to worry about taxes on withdrawal. It’s beneficial to have a balance of these accounts as you approach retirement.
Sometimes people want to roll after-tax money into a Roth IRA account, but there’s a catch to that. You can roll pre-tax money into the Roth IRA, but you also have to roll a proportional amount of money into a traditional IRA. This has to do with a mega roth strategy. Some 401ks allow for after-tax contributions (non-Roth) on top of the maximum employee contribution. At that point, it can be rolled into a Roth IRA – either each year, or at retirement date.
You can also check out this post where I wrote about how to strategically plan your retirement withdrawals.
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.