8 Costly Investment Mistakes to Avoid
You’ve diligently saved your money and now it’s time to invest it. You have choices to make; but they’re not necessarily easy choices, especially at first.
There’s a lot to learn about investing. But the risk is that you could lose some of that money educating yourself.
How can you avoid making that kind of costly mistake? One of the quick ways to get your bearings is to learn what not to do.
Top Investing Mistakes You Can Avoid
Investing advice varies and it can be important to understand mistakes investors make and how to avoid them. Here are eight of the worst investment mistakes to watch out for:
- Bandwagon investing advice
Dating back to the 17th century tulip-bulb mania, there have been popular investment crazes that really can only be described as mass hysteria. Whether it is tulip bulbs or Bitcoins, the louder the hype, the more questions you should ask before investing.
- Letting CDs roll over and play dead
Too often, people just let their CDs renew automatically. This is an especially bad approach when CD rates are low. Every time you have a CD up for renewal, make two decisions: what length of term now suits your needs and the rate environment, and which bank offers the best CD rates at that length. Research rate offers from multiple banks and consciously renew or move your CD.
- Investing advice: volatility vs. risk
Beta is an investment statistic commonly used to measure the riskiness of individual stocks and stock funds. When considering how to avoid losing money on investments, some investing advice focuses on beta but it is not especially relevant to determine whether or not to invest in stocks. Beta is based on quarterly price fluctuations, but your actual investment risk is the possibility for lasting losses, not short-term changes.
- Defining risk too narrowly
The risk of losing money is just one form of risk. As savings account rates have demonstrated in recent years, another risk is having returns dwindle drastically. Investing conservatively is not necessarily the same as entirely avoiding risk. One of the worst investment mistakes is to view risk myopically.
- Shopping cart investing advice
An investment portfolio should be made up of coordinated parts functioning within a clearly-defined investment plan. The reality is that people tend to pick up investments here and there when they happen to come across something appealing. This is like going grocery shopping without a list — the stuff that catches your eye and gets thrown into your cart is not necessarily the stuff you need.
- Paying excessive fees
The paradox is that the investment business is both extremely competitive but also prone to high fees. Be cautious about investment products with a sales load. Paying to get into or out of an investment can inhibit your flexibility and add an unnecessary layer of fees.
- Failure to compare investments
When it comes to basic savings accounts, people too often just accept whatever their current bank is offering, even though the best bank rates are several times higher than the national average.
- A high-water-mark mentality
Rationally, most investors know that stocks can go up and down in value, but there is a psychological tendency to assume each high water market is the new normal. The problem with this is that, as was common in the 1990s, it can leave people to overestimate their nest eggs and slack off on further saving.
Viewing this list as a whole, perhaps the strongest message is that there are common investment mistakes that people make every day — and there are several others not on this list. The best solution is to be disciplined about your investment decisions and give them the time they deserve. After all, when you are investing for the long haul, there is no reason to feel rushed into a short-term decision.
Frequently Asked Questions
Q: With interest on savings accounts near zero and checking account fees going up all the time, would I be better off with an alternative like bitcoins? I see that more and more places are accepting them for payments.
A: Many people share your frustration with traditional banking, but that does not mean that Bitcoin is a good alternative.
Here are some of the things you would be giving up if you traded your bank accounts for bitcoins:
- FDIC insurance. You can argue whether Bitcoin is the wave of the future or a speculative fad, but you really cannot argue that bitcoins and deposit accounts resemble one another in any meaningful way. Deposit accounts at FDIC-member institutions are guaranteed up to $250,000 — a level of security you cannot get with alternative currency investments.
- Regular interest. Sure, interest rates on savings accounts and other deposits are frustratingly low, but at least they offer interest. Bitcoin speculators are betting that the value of bitcoins will rise as more and more people buy into the concept. Remember though, that’s also the principle by which people hope to make money in Ponzi schemes.
- Stability. It is one thing to not pay interest, but another crucial difference between a deposit account and Bitcoin is the wild swings in the value of the Bitcoin. You may not like checking account fees, but how would you feel if your balance was worth $500 one month and $300 the next, simply because the value of the Bitcoin changed?
- Widespread acceptance. You mention seeing more and more places accepting bitcoins, and it does seem that every week or so there is a news article about a retailer agreeing to accept them as payment. However, the fact that this is considered news means the Bitcoin is still far from enjoying universal acceptance.
Ultimately, it is difficult to view an investment in bitcoins as anything other than speculative, because procedures for managing the currency are still being formulated — as are the regulations that govern it. Because New York State is home to many Bitcoin-related firms, it recently proposed the first wave of Bitcoin-related regulation. However, if regulation evolves on a state-by-state rather than a national basis, it could put a damper on the free exchange of this alternative currency.
If you find your interest rates too low and your checking account fees too high, take out your frustrations on your current bank — not on all banks. Shop around and chances are that you can find both free checking and a higher savings account rate. After all, if security and liquidity are what you want, you probably should not be a Bitcoin pioneer. Remember, pioneers are often the ones with the arrows in their backs.
More resources for investors:
To learn about portfolio re-balancing techniques for different age groups, read: Why you need to re-balance your investments today.
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