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Common Errors
How to Avoid the 8 Biggest Investment Mistakes
Are you as good an investor as you think? Chances are, you are making common errors that could cause you to lose your financial independence, control and security.
"I see people making the same costly mistakes over and over," says Scott Frush, certified financial planner and author of Optimal Investing: How to Protect and Grow Your Wealth with Asset Allocation (Marshall Rand Publishing, 2004).
Here, Frush shares 8 common yet costly mistakes and reveals how to avoid them.
1. Omitting appropriate asset classes. Numerous landmark studies have concluded that how you allocate your portfolio, rather than which investments you select or when you buy or sell them, determines the majority of your investment performance over time. As a result, allocate to all appropriate asset classes.
2. Selecting inappropriate asset class weightings. By selecting inappropriate asset class weightings, a portfolio may earn a lower return and experience greater risk than expected. Consequently, be careful not to over or under weight any asset class, thus enhancing your portfolio's risk and return trade-off profile.
3. Underestimating the impact of inflation. Inflation can erode the real value of your portfolio over time, thus placing your future financial security at risk. As a general rule, the longer your investment time horizon, the more you should allocate to equity investments.
4. Neglecting the effects of portfolio management expenses. Over time, the compounding effect of portfolio management expenses can be quite large, thus depriving you of better returns. For this reason, you should focus on minimizing portfolio management expenses, specifically trading costs, advisory fees and taxes.
5. Making inaccurate return forecasts