BUSINESS

  PERSONAL WEALTH HEALTH

AVOIDING MISTAKES

FOLLOW THESE SIMPLE TIPS FOR PROFITABLE INVESTING

IN MORE than 40 years of investing — and writing about it — I’ve made many mistakes and have learned from the mistakes of others as well. Though I can’t promise that avoiding the following mistakes will guarantee success, doing so will greatly improve the odds.

Here are six that I consider the most important to avoid:

1 GOING AT IT ALONE

To me, trying to pick individual stocks or bonds is a loser’s game. Decades of experience show that even full-time professionals do a poor job of trying to beat or even meet the market. Instead, stick with mutual funds; especially index funds, which are funds that set out to track indexes, such as the Dow-Jones or S&P 500.

2 CONSTANTLY BUYING AND SELLING

Every time you buy or sell a stock, you help your broker get rich. Though there are plenty of “experts” who will tell you that the old buy-and-hold philosophy of investing is obsolete, don’t believe it.

Only buy stocks of companies that you feel are solid, and hang on to them until and unless there is a major change in said companies’ fundamentals.

3 FALLING FOR “THE PAST PREDICTS THE FUTURE” TRAP

It’s natural to look at an investment’s past history as a dependable predictor of its future. However, experience shows that it’s not uncommon for an investment to have a better-than-average performance one year and a mediocre or even dismal performance the following year. In fact, The Securities & Exchange Commission issued a directive requiring mutual fund issuers to tell investors that a fund’s past performance does not necessarily predict future results.

The moral of this tale: Don’t make an investment solely on recent past performance. Always research the fundamentals as well.

4 TRYING TO ESCAPE RISK

There is no such thing as a risk-free place to put your money. While stocks carry the greatest potential for loss, they also carry the greatest potential for gain. That’s why virtually every financial pro agrees that the best formula for potential gain and minimizing risk is a well-diversified portfolio including stocks, bonds and cash equivalents.

5 FOLLOWING THE HERD

Following-the-herd behavior is quite harmless in most circumstances (think teenagers dressing and talking alike), but not so when it comes to investing your money. When the market is at a peak and everyone else is buying, this may be your time to sell, and vice versa. As Warren Buffett said, “You should be greedy when others are fearful and fearful when others are greedy.”

6 INVESTING WITH EMOTION

No matter how well your portfolio is diversified and allocated, it will always be vulnerable to some degree of risk. That’s why you must not allow your emotions to overrule common sense when it comes to dealing with market volatility. When the market is in a slump, your emotions may scream that this is the time to cash out. Before you succumb to that emotional imperative, think about your long-term goals for that money. Remember, the market has always recovered from slumps and gone on to record highs.

A STEP AHEAD

Avoiding these six mistakes alone cannot guarantee investment success, but doing so puts you a step ahead on that long road to financial security. OM

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax advisor for advice regarding your particular situation.

WILLIAM J. LYNOTT is a freelance writer who specializes in business management and personal and business finance. Visit www.blynott.com, or to comment on this article, visit tinyurl.com/OMcomment.