As a financial advisor, I have helped hundreds of clients with their finances during my career. Clients often arrive with worries having already taken a misstep or two, but I’ve observed common investing mistakes that can easily be avoided.
I’m happy to share the top 10 investing mistakes to avoid so you can set yourself up for success for years to come.
1. Not having an adequate emergency savings account.
You might be wondering, what does an emergency fund have to do with investing? Well, if you were to face a large, unexpected expense, such as a hospital stay or damage to your home, not having at least three to six months of your average monthly expenses saved in cash will likely require you to take on very expensive credit card debt or force you to withdraw funds from your investment accounts.
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Doing the latter can result in significant taxes and penalties and significantly hamper your quest to achieve your future investment goals.
2. Not investing enough for the future in your twenties and thirties.
It can be difficult to save and invest enough in the early years of your career. Housing, student debt, and having a lower salary can cause fewer funds available to save in an IRA and/or 401(k). However, through smart expense management and investment in your skills (aka your human capital), you can actually save significant amounts of money each year.
By doing so, you can harness the power of compounding. It is the ability of an asset to generate income which, when reinvested or kept invested in the main asset, will generate additional income.
3. Don’t increase your maximum pension contributions over time.
With fairly common regularity, the IRS will increase the maximum amounts that can be invested in retirement investment accounts. In fact, these limits have recently been increased from 2023 (opens in a new tab). Starting next year, the amount an individual can contribute to a 401(k), 403(b), and most 457 plans increases to $22,500, up from $20,500 in 2022.
Contributions to the IRA can reach $6,500, an increase of $500 from the current annual limit of $6,000.
If you don’t remember to adjust your annual contribution amounts to take advantage of these increases, you lose the ability to accumulate even larger amounts to accumulate over time.
4. Believing that owning more than a few stocks means you are properly diversified.
There’s been a lot of talk lately (with good reason) about the importance of developing a recession-proof portfolio that’s well-diversified. But how do you know if you are diverse enough? It is not enough to buy several stocks and/or mutual funds if they are generally all moving in the same direction at the same time (i.e. they are all highly correlated to each other).
The hallmark of a properly diversified portfolio is one that contains securities invested in various asset classes and geographic areas that are uncorrelated to each other.
As the saying goes, don’t put all your eggs in one basket.
5. Continuing recent performance.
It is understandable to look at how a particular investment vehicle has performed in the past to know if you should invest in it now. However, there’s a reason the adage “past performance is no guarantee of future results” has resonated for so long.
The investment landscape changes over time, sometimes very quickly and unexpectedly.
Instead, spend time understanding an investment’s future prospects and how it fits into your overall portfolio.
6. Try to constantly time the market.
Simply put, trying to time the market is a wild ride. No human or algorithm has been proven to correctly pick individual winners based on short-term market movements over a long-term time horizon, so you shouldn’t try to do that either.
Attempt to trigger trading fees and taxes, as well as damage your sanity.
Creating a long-term plan with a corresponding investment strategy will produce positive results consistently, while market timing will inevitably turn around at some point.
7. Take financial advice from friends or colleagues.
It’s human nature to want to emulate the behaviors of successful people. However, it is also common for people to highlight their successes and conveniently ignore their failures.
Avoid following the water cooler chatter about how to invest.
Instead, work with a Certified Financial Planner to help you build an appropriate portfolio that matches your personal goals.
8. Not recognizing your true appetite for investment risk.
Too often people focus on the potential benefits of an investment in a certain way without adequately recognizing the risks involved in investing. When it comes to an investment security, look at the standard deviation which measures the overall level of expected volatility.
If a media frenzy over a particular asset’s fall is keeping you up at night, it’s time to reassess your portfolio for risk assessment.
9. Failing to implement asset location.
Not all types of investment accounts are taxed equally. Current tax law states that gains that occur in each of the three main types of accounts (tax-deferred, taxable, and after-tax) are all taxed differently.
Since future tax rates are unknowable with absolute certainty, a sound tax mitigation strategy is asset location, which means you would open and fund over time at least one account in each category. Specifically, a brokerage account (which is taxable), a retirement account such as a traditional IRA (tax-deferred), and a Roth IRA (after-tax).
10. Compare yourself to others.
Investing is a behavior pursued in order to increase one’s wealth. Don’t let this pursuit serve as the main driver of your overall happiness. Don’t beat yourself up because you haven’t invested the way others have. Errors will occur.
Working with a professional wealth advisor is a great way to help define what happiness really means to you and how you can enjoy many well-lived today and tomorrow.
When you are new to investing, you are sure to make some of these mistakes. But over time, the goal is to learn, grow with your team of trusted advisors, and build a diversified portfolio that will grow your wealth.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC-registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees and services, is available at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal trading in securities or to provide personalized investment advice. The information provided does not constitute legal, tax or accounting advice. We recommend that you seek the advice of a qualified lawyer and accountant.
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).
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