There are many ways to err in investing your money. The plethora of investment choices to choose from can be overwhelming. Do you pick large-cap value stocks, blue-chip companies, an equity fund , a bond fund, index fund, Treasury Bonds, or how about a Puerto Rico Municipal Bond? The truth is somebody is making money (usually it’s the middle man-brokers, advisors, etc), losing money (you, but not always), and making some big investment mistakes. Here are the three mistakes investors make and you should avoid: 1. Don’t have a plan. The old adage “Most people don’t plan to fail, they fail to plan,” holds its truism even in today’s “still-uncertain” economy. By the way, in my opinion, there’s no such thing as a certain economy. Investors don’t know exactly what the future will be like for them. Of course the market will have its inevitable and unambiguous volatility. That we know. Investors seem to be surprised when the market takes a dive. The most important thing to do is to have a plan. I repeat: have a plan in place. Don’t time the market. Many investors, due to their emotions, made a decision to withdraw all their funds from the stock market and allocate them to very conservative or cash equivalent investments. Moreover, when the market “rebounds” in the eyes of the investor allocating the money back into the stock market is not a clever move. Typically, you will have to pay more to jump back in because the market is moving in an upswing (prices are higher) and you may have missed out on the biggest trends. However, allocating your money to such conservative investments is not a fallacious idea if it’s part of your investment strategy and not part of your emotional strategy. Market timing is betting. Investing is not.In conclusion, the plan is to develop (hire a professional if you need assistance) an investment strategy which includes your short-term, mid-term and long-term goals.2. Cost. Most investors do not pay attention to cost. Typically, they don’t understand its relative importance. Cost does matter. Costs will eat your returns. Why must an investor pay a sales fee (load) to purchase a stock or mutual fund? At times, cost can be the difference of whether you will earn a positive or negative return, even in a bear market. Cost can increase your loss and decrease your return. Review the expense ratio, which apropos doesn’t represent the entirety of the expenses. You could easily add to it another 1% to 2% for marketing fees, commissions, and etc. 3. Lack of Diversification. Diversification means to minimize your risk. It means you should have cash on hand, too. Allocating your funds among different assets classes, such as stocks and bonds, can reduce your emotional distress and you will not need to over monitor your investments. This will reduce impulsive decision making and it should restrict investors from reading the proliferated websites and news of investing. On the other hand, it’s very important that you review your investment performance once or twice a year to ensure its alignment with your investment strategy. Final note:
Investing does not need to be exciting. Unless you are a day trader, there’s not much excitement. Index funds are great and boring vehicles to implement your long-term financial goals. Also known as, “If you can’t beat ‘em, join‘em.” They mimic financial markets and market sectors. Index funds provide diversification and have lower expenses than professionally managed mutual funds. Typically, when you are choosing a mutual fund, you want to look at who are the managers of those funds and their experience and how long they have been with that specific mutual fund company. In addition, you have to evaluate the expenses. Index funds eliminate the risk of individual stocks and instead opt for a more passive form of management. I’m telling you this to say this much that as young adults you have plenty of time to invest. The trade-off between risk and reward is truly driven by time. In addition, unless you have confidence in choosing superior money managers, you will be better off with a total stock market index fund. Keep your Moneylicious!