Yahoo Finance Financial Advisors: 9 Investment Blunders To Avoid in 2024
While investing has become much simpler thanks to a variety of accessible tools available to the average person, doing so without financial education or a plan can lead to unfortunate blunders and unnecessary risks.
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When you start investing from scratch, take time to educate yourself or seek out professional advice. If you don’t know what you’re doing, you could be more tempted to jump on a trend, a fad or an investment opportunity that isn’t secure.
GOBankingRates reach out to a few financial advisors for their take on investment blunders new investors should avoid.
Not Understanding Differences In Investment Products
One mistake people make is not understanding the difference between financial products offered by banks and financial institutions, especially when they coexist within the same branch, according to Hazel Secco, Certified Financial Planner (CFP), Certified Divorce Financial Analyst (CDFA), president and founder of Align Financial Solutions, LLC.
“For instance, it’s essential to understand the distinction between a money market fund and a money market account,” she said. “While both are relatively conservative, a money market account from a bank prioritizes capital preservation, unlike a money market fund, which is a mutual fund and doesn’t guarantee capital preservation.”
She said many mistakenly believe that a money market fund protects principal. This isn’t something you want to learn the hard way.
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Overlooking Asset Allocation and Failing to Diversify
“One of the cardinal sins in investing is putting all your eggs in one basket,” said Andrew Latham, a CFP with SuperMoney.com.
He explained that diversification across different asset classes — meaning spreading out your investments in stocks, bonds, real estate, etc. — and within asset classes, such as different sectors, industries and geographic locations, can reduce risk and improve the potential for returns.
“In fact, according to research by Gary Brinson, Randolph Hood and Gilbert Beebower, over 90% of a portfolio’s volatility is determined by asset allocation,” Latham continued.
Ignoring Fees and Expenses
Another mistake is thinking that the fees you pay don’t make much of a difference.
Latham pointed out, “Even small differences in fees can have a significant impact on net returns over time. To illustrate, a 1% fee on your portfolio will cost you nearly a third of your returns — 28% — over a 35-year period.”
High expense ratios for mutual funds, excessive brokerage fees, and costs associated with buying and selling will eat up your profits, as well, he said.
“On the other hand, managing your own investments, having a long-term strategy and choosing passively managed index funds can save you a fortune in unnecessary expenses,” he said.
Trying To Time the Market
According to Robert R. Johnson, PhD, Chartered Financial Analyst (CFA), and professor of finance at Heider College of Business, Creighton University, another blunder is believing that you can “time the markets — getting out of stocks before a decline and getting back into stocks prior to a stock rally.”
Unfortunately, nothing could be further from the truth.
Johnson explained, “None other than Vanguard founder Jack Bogle is quoted as saying on market timing — ‘After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently.'”
Instead of trying to time the market, most investors would benefit from dollar-cost averaging, Latham said, which means investing a fixed amount regularly regardless of market conditions.
“This removes traps of emotional investing and can help reduce the impact of volatility,” added Latham.
Daytrading Stocks
It’s much better to think of investing as a marathon and not a sprint, Johnson said. As such, he considers trading “hazardous to one’s wealth.”
He added that academic studies performed on day traders across the globe consistently find that the vast majority of day traders are unsuccessful.
“For example, academics from Brazil examined people doing short term trades and found that of over 1,500 retail traders, a scant 1.1% posted higher average returns than the Brazilian minimum wage,” he explained.
Other studies showed similar results with more losses than successes.
Following the Crowd
Trying to invest like others do isn’t a great idea, Johnson said, because everyone’s needs, risk tolerance and financial stability varies.
The most effective way to avoid herd behavior is to establish an investment policy statement (IPS) and follow it, Johnson said.
“Investing without a plan is like driving without a roadmap or GPS. Investors should not concern themselves with broad market moves or the crisis de jour,” Johnson said.
An IPS is a written document that clearly sets out a client’s return objectives and risk tolerance over that client’s relevant time horizon, along with applicable constraints such as liquidity needs and tax circumstances. In essence, an IPS sets out the ground rules of the investment process — it is the document that guides the investment plan, he explained.
“The IPS should include a glide path for target asset allocation changes as the individual ages,” Johnson continued. “And, it is best to develop an IPS in a rather calm market. Developing an IPS in a volatile market or during major stories is problematic.”
Speculating in Fads or Cryptocurrency
If you want to make reliable returns, speculation on new investment types is a bad idea, Johnson insisted, including things like cryptocurrencies. The crypto market has never been a good place to invest.
Of investing in crypto, Johnson said, “I can think of few worse strategies than committing investment to cryptocurrencies. One cannot invest in the wide array of cryptocurrencies, one can only speculate. There is no rational way to determine the value of bitcoin or any of the other various cryptocurrencies as one can’t apply the tools of traditional finance to arrive at the intrinsic value (or true value) of the supposed asset.”
Chasing Winners
Additionally, Johnson said that too many investors assume what is currently happening, good or bad, is going to continue into the indefinite future.
“There is something about seeing others get rich quickly that brings out the greed in all of us. And that’s more than a little dangerous to our financial health,” explained Johnson. “We would be wise to heed Warren Buffett’s advice to ‘be greedy when others are fearful and fearful when others are greedy.'”
Going It Alone
Johnson is a firm believer that investors should get professional advice before making big decisions, because financial mistakes, particularly early in life, can be difficult to overcome if you don’t have support.
“Financial advisors help you stay the course during volatile times,” added Johnson. “Some people mistakenly believe that the services of a financial advisor are only needed in the wealth accumulation stage. Advisors are also needed during retirement to help guide individuals spending their nest egg.”
While a certain amount of investing requires some trial and error, the best approach is to seek advice and education before going down an investment path you regret.
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This article originally appeared on GOBankingRates.com: Financial Advisors: 9 Investment Blunders To Avoid in 2024
