10 Common Investing Mistakes to Avoid (+ How to Avoid Them)

Every investor’s greatest hope is to land the opportunities that turn their investments into substantial gains. But on the path to finding those ideal portfolio additions, it’s easy to make mistakes that throw you off the way to your financial goals.

This problem happens to the best of us, especially in our early investing days. The good news is that when you’re aware of the typical mistakes made by investors, you can take steps to avoid them.

Here are the 10 most common investing mistakes made in the industry, along with tips on how to avoid them.

1. Failing to Plan For Your Goals

To reach your goals effectively, you need to know what they are. Failing to plan, as the famous quote says, is planning to fail.

Maybe you’re a SMART planner (Specific, Measurable, Achievable, Relevant, and Time-bound), or you prefer to use the OKR (Objectives and Key Results) or WOOP (Wish, Outcome, Obstacle, Plan) methods.

Whatever type of planning strategy you’re comfortable with, apply it to your financial goals. Your investments are tools you’ll use to reach these objectives.

Breaking Down Your Financial Plan

Successful plans include the following parts:

• Clear, defined short-term, mid-term, and long-term goals – What are your targets? How much money will you need to reach them?
• A budget that maximizes income and minimizes spending – Cash flow gets reallocated to your goals. (Consider the 50/30/20 budget as you get started.)
• Investments aligned with your goals – Short-term targets may require aggressive savings, while long-term goals can harness the power of compound interest and weather market dips.

Once you’ve detailed a plan of action, it’s vital to stay disciplined with your income generation, spending, and savings. Without discipline, it’s easy to fall for emotional splurges.

For those concerned about this step, taking proactive action, such as cutting up credit cards (Be cautious about canceling them, as that can hurt your credit.) or implementing multi-step passwords before online ordering, may be wise.

Let Your Plan Be Flexible, Not a “Set It And Forget It”

Review your goals and progress regularly. Many people — like physicians who own a practice — already engage in quarterly financial reviews, making it an ideal time for goal evaluations and adjustments, too.

You have a target and a timeframe. With regular evaluations, you can design and tweak a plan that will most efficiently get you there and monitor the milestones along the way to show whether you are or are not on track.

2. Jumping in Without Understanding The Investment

Get-rich-quick schemes are everywhere, and they can look and sound legitimate. In a world of AI-generated content, though, it’s more important than ever to do your due diligence before handing your money over to anyone.

You’re investing your money, so it’s only natural that you’d want to research the company for yourself. If your investor is offended that you want to take time to evaluate the proposition, consider it a red flag and look even more cautiously.

Investigating an investment is more than checking out the business models. Get familiar with what you’re potentially investing in, including the opportunity’s financial health and market position. What are the risks versus benefits? Are they aligned with your risk tolerance (which we’ll discuss later)?

If you don’t understand the possible risks and benefits, or anything raises a red flag, either walk away or review the investment with a trusted financial advisor.

3. Staying Loyal to a Company

There’s a lot to be said for faithfulness, but when it comes to your investments, your number one loyalty should be to yourself and your family. Sticking with an investment company or long-term advisor isn’t always the best decision, particularly if they aren’t putting your needs first.

It’s not unusual for investment companies and solo advisors to have preferred products that they’re familiar with and recommend, even if it’s not the “best” option for the client. This scenario may happen when the advisor receives a commission for sales or becomes complacent and chooses not to continue learning about new products on the market.

Either way, you could be missing out on better opportunities with this type of blind loyalty.

Limited diversification is another danger to avoid. When you over-rely on a single investment company, your portfolio can lack diversification, leaving you vulnerable to risk. An over-concentrated portfolio that focuses most of its success on one company creates a high-risk situation — if that company fails, so does your entire foundation of wealth.

That being said, many people enjoy the comfort and ease of working with an advisor they’re familiar with. Staying in one place reduces the need to repeatedly build trust and explain goals.

If you prefer an advisor you can grow with, look for firms that are designed for holistic wealth management and have a fiduciary duty to their clients, like our professionals at OJM Group.

4. Missing The Mark With Your Risk Tolerance Level

 

In the financial world, risk involves your ability and willingness to ride out fluctuations that could bring losses if there’s a possibility of higher returns. Your tolerance is the level at which you are both willing and able to invest. This mark is along a spectrum of conservative through aggressive, and there’s no “wrong” degree of risk tolerance.

However, when you miss the mark with your tolerance level, you may either miss out on opportunities that were feasible and profitable, or overshoot your investments and take a hit that’s challenging to recover from.

What Does Risk Tolerance Mean?

Risk tolerance includes factors like your:

• Age
• Income
• Financial goals
• Experience with various investments
• Emotions

Yes, your emotions matter, too. Fear causes many investors to sell when they should hold. Excitement brings on a “buy” impulse, followed by remorse when the investor realizes they didn’t make such a great choice, after all.

5. Not Diversifying Your Portfolio

How do you know if your portfolio is well-diversified? The key is to have a balanced mix of asset classes, including investments in cash, stocks, bonds, and possibly alternatives..

What Are The Three Types of Asset Classes?

The most common three asset classes include equities (stocks), fixed income (bonds), and cash and cash equivalents.

Equities are shares in a company, considered risky with a potential for high investment returns.

Fixed income investments in the form of bonds are loans made to a corporation or government that are paid back in regular interest payments until the bond matures. These are lower risk than equities, but still risky if the issuer defaults.

Cash and cash equivalents are investments that are low-risk and highly liquid. This asset class is the most stable, but has the lowest potential returns.

Each asset class plays a distinct role in your portfolio, whether it is in a checking account or a mutual fund investment. Cash may be used in an emergency to prevent the need for loans or dipping into other accounts. Retirement plans are wise ways to reduce tax liability and plan for the future. Stocks, bonds, and other market investments can help you grow your wealth in a risk/reward fashion.

Why Is Asset Class Diversification Necessary?

But a lack of diversification in any particular asset class can harm your financial goals. Let’s look at a few common situations in which an investor’s wealth was negatively impacted due to an imbalanced investment portfolio:

• A breadwinner in the household was out of work for a period, and the savings account was low. The couple had to withdraw from their investments to cover their bills, resulting in a significant tax penalty for early withdrawal.
• An investor placed a significant portion of their long-term savings into one company that appeared to be a surefire winner…on paper. The company had poor performance, and this unsystematic risk fell back on the investor, who lost their savings.
• The stock market dipped, and an investment’s share fell heavily due to panic-selling. The investor lacked sufficient diversification to cushion the portfolio during this downturn, resulting in a loss of wealth.

An incomplete portfolio focuses on one or two areas, limiting the opportunity for other asset classes and sectors to grow. This reduced exposure inhibits your ability to respond successfully to changing economic conditions. When your asset allocation is off-course, risk increases.

A healthy portfolio avoids overconcentration in a particular asset class without overlooking any of them. It also involves regularly rebalancing to adjust investments to evolving goals, needs, and economic conditions.

6. Setting And Forgetting Your Investments

When you have a busy life — like physicians do — you have enough on your plate without worrying about regular check-ins to monitor your investments. However, “setting and forgetting” can be dangerous to your financial goals.

Just as the economy changes over time, so do tax laws, market developments, and economic trends. Some of these evolutions can be beneficial if you ride them out (even accidentally), but others can substantially harm your portfolio.

Dangers of Not Rebalancing Your Portfolio

Without periodically checking in on your investments, your asset classes can shift. This phenomenon is known as “asset drift,” which alters your risk profile, often pushing it beyond your tolerance. If one asset class outperforms another, your risk in those lesser-performing areas unintentionally increases.

Over time, your investment goals and risk tolerance change, too. You may have had a career advancement that opens up more opportunities, or you could be nearing retirement and ready to lower your risk in long-term investments.

Market developments are constantly evolving as well. If you’re not paying attention, you could miss out on ways to invest with lower fees or a change in your financial advisor firm that impacts your portfolio’s performance.

When You Should Review Your Portfolio

Once you set your investments, you don’t need to check on them all the time, especially if you’ve hired a professional to ensure they’re performing as expected. However, regular quarterly, bi-annual, or annual reviews keep you informed on how your wealth is doing.

Periodic reviews are necessary, but they’re not the only time you should evaluate your portfolio. Significant life changes, such as retirement, marriage, or the death of a spouse, are times when a reassessment is necessary.

If you know you don’t have the time or passion to keep up with investment strategies and laws, avoid making this mistake by hiring an expert to do this for you. Schedule check-ins as you prefer, and ask them to contact you with any potential changes.

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7. Not Aligning Your Investments With Your Values

Your personal values can guide your investments. This is different from making decisions based on emotions.

For example, you’re passionate about helping the world go green one step at a time, and you find out about a new environmentally-friendly product offered by a startup. You know it’s a risk — after all, they’re brand new and have no consistent backing — but you’re impressed by what they offer and how they present themselves. To you, they’re a worthy risk.

On the other hand, you’ve been offered the opportunity to invest in a company that doesn’t align with your values. Their products or services directly counter your green focus. Although they’re a better risk on paper, investing in them makes you conflicted and morally uncomfortable.

Research investments and focus on those that match your risk tolerance and values.

8. Attempting to Time the Market

 

Timing the market is a strategy many investors try to excel in, but few succeed. “Time in the market beats timing the market.”

Buying low and selling high sounds great, but short-term market volatility leads to more transaction fees and the possibility that the long-term gains you could’ve had are now in the past.

Capital gains happen when you sell an asset for more than what you paid. The profit, or capital gain, is taxable and falls into the short-term (assets you held for one year or less) or long-term (assets held for more than one year) category.

The difference between the two categories matters more than you might think.

Short-term capital gains are taxed at the same income rates as your other income. This can range from 10-37%, making it a big deal. But if you can hold on to those assets instead of “timing the market” and turn them into long-term gains, the taxable rate reduces to 0%, 15%, or 20% (depending on your income level).

9. Investing Based On Emotion

Investment decisions should come from a place of evaluation, understanding, and a clear understanding of potential impact. When they’re done from excitement or fear, it may not have the result you expected.

This issue frequently happens when there’s an urgent need for a movement. That upcoming time horizon frequently forces you into decision paralysis or impulsive reactions.

Investing based on emotion could be one of the biggest mistakes you make without realizing you’re doing it. This error can be avoided by working with a financial advisor with whom you have a trusting relationship. Run your thoughts by them, and discuss how your decision could hurt or help future financial goals.

10. Not Checking The Costs

Every investment has associated fees. If you don’t check into the costs from start to finish, you could find yourself hit with unexpected charges.

While fee structures are supposed to be transparent, you need to know what you’re looking at and paying for. Watch for the costs incurred in:

• Account management fees
• Taxes
• Commissions

Ask any potential financial advisor how much you can expect to pay in total for their services, including any product fees, commissions, taxes, and portfolio management costs.

How Working With a Firm Like OJM Group Can Help You Avoid Mistakes

Moving your financial goals forward means building a diversified portfolio complete with innovative product vehicles like Exchange-Traded Funds (ETFs), index funds, and emerging investments that match your goals. When you’re ready to make that happen, it’s time to sit down with OJM Group, a financial advisor who knows your unique needs.

Partnering with our financial professionals ensures you receive:

• Goal-setting guidance targeted to your situation
• Decision-making based on expertise, not emotional choices based on market conditions
• An intentional portfolio diversification based on goals and investment risk
• Expertise from an investment adviser that helps you avoid scams, optimize your taxes, and make informed decisions on investment products

As a Registered Investment Advisor (RIA) company, we have a fiduciary duty to ensure you receive ongoing support and financial advice that are always in your best interest.

Conclusion

From investment management fundamentals to the complex nuances that drive our business, OJM Group is ready to help you with investment advice that takes you the next step forward in your financial planning.

Contact us today to begin building an investment plan that accompanies you throughout your wealth management journey.