What are some common investor mistakes I should avoid?
Overly Cautious – It’s tempting to be cautious with your hard-earned money, but over the long term, stocks offer the best chance for earning inflation-beating returns. As you get older, you may want to cut back on how much money is invested in stocks. Our Risk Tolerance Quiz can give you an idea of how you may want to allocate your money based on your tolerance for risk, your goals, and your timeframe.
Not Diversified – Investing in only a few companies or in a single market sector (such as utilities or technology) generally exposes your portfolio to increased risk that your investments could lose value, leaving you without gains from other investments to cushion your losses. Diversifying your portfolio can help you manage your risk. That way, if one sector of the economy or one investment class isn’t performing well, your other investments may pick up the slack.
Overreacting – Letting your emotions get the better of you can really take a toll on your investment portfolio. For example, taking your money out of the stock market – even for a short period – may prevent you from reaping the rewards of a market rally. By not being invested when the market starts a recovery, you could lose out on potentially significant gains.
Market Timing – This is an investment strategy based on predicting when prices of investments will rise and fall and then trying to buy low and sell high based on that prediction. While it makes sense in theory, it’s extremely hard to do successfully.