Avoid these eight common investment mistakes
Vail, CO, Colorado
What are some of the common mistakes made by individual investors? Here are eight to keep in mind:
– Not having enough money on hand for emergencies. No one expects to lose their job or become ill. But it can happen, and the financial repercussions can be lasting. A prudent strategy is to keep enough money in a separate account to cover living expenses for up to six months. Once your emergency plan is in place, you’re ready to set up a regular investment plan for your future.
– Delaying your investments. This can cause real damage to your financial future, because time is a great ally when investing. Even relatively small amounts of money can grow rapidly over time. For instance, if you invested $1,200 per year and earned 8 percent annually, you’d have $43,740 in 17 years. Sock away $200 at the same rate, and your account would grow to $87,481.
– Keeping too little in stocks. Many people don’t have enough of their money invested in stocks and related investments. That’s unfortunate. While stocks do go up and down, history has shown that they perform well over time. According to Ibbotson Associates, over the period from November 1926 through 2004, compound annual growth rates have been as follows:
Small-company stocks: 12.9 percent.
Large-company stocks: 10.4 percent.
Long-term government bonds: 5.4 percent.
Treasury bills: 3.7 percent.
Inflation: 3.1 percent.
– Paying too much in taxes. Millions of Americans can cut their tax bill each year if they take the time to consider their choices. Here’s how you can cut yours: Contribute as much as possible to your company 401(k) plan. You may be eligible for a tax deduction on the contribution, and your earnings will grow tax¬-deferred.
Also, think about putting money in municipal bonds and annuities. Annuities generate tax-deferred earnings. (However, be aware that withdrawals from an annuity before age 59 may incur ordinary income tax plus a 10 percent tax penalty.) Municipal bonds pay tax-free interest.
– Buying yesterday’s winners. Last year’s best investment rarely turns out to be this year’s best investment. Don’t buy a security just because it has been rising rapidly in recent months. Evaluate its potential for continuing the positive trend.
– Not focusing on fundamentals. Sometimes investors get caught up in the excitement of the market, buying when stocks are high, selling when they are low ” just the reverse of what you need to do. When you buy a stock, you’re buying a piece of a business. Looking at the fundamentals — the financial results and management — of that business can help you buy low and sell high.
– Being unprepared. Many investors make an investment believing it will only go up in value. Be prepared for it to go down. If it does, and the underlying business is sound, the decline may be an opportunity to buy additional shares at a more favorable price.
– Failing to get professional guidance. Not many individuals have the time and expertise to monitor the financial markets and make investment decisions based on intensive research. The guidance of a full time investment professional may increase your profit and reduce your risks.
Provided courtesy of Fraser M. Horn and Dudley M Irwin, Investment Advisers with Berthel Fisher in Edwards. For more information, call 926-2500.