In a recent survey, high net-worth clients (those with more than $1 million in assets) were asked about their top five investing mistakes. Not surprisingly, some of these are ones that everyone faces, regardless of net worth. Some of these mistakes can be very costly, making the difference between financial dependence and financial independence.
Here are the top mistakes and what you can do about them.
1) Failing To Diversify. Almost a quarter of millionaires said their
top investing mistake was not diversifying enough. No matter how much
you make, diversifying is crucial to investment success. Karl Eller was a
founding investor in the Phoenix Suns, built a successful advertising
business and was head of Columbia Pictures. He invested almost his
entire net worth on purchasing the convenience store chain Circle K.
Under his leadership, it grew considerably, but he failed to diversify.
When Circle K declared bankruptcy in 1990, he lost close to $1 billion
and left with almost nothing. In an interview with Tony Robbins, he
mentioned that lack of diversifying was the biggest mistake he made.
Spreading your investments around is one of the best ways to manage and
lower risk. It has to be done correctly. Diversifying only is helpful if
each different investment has a different risk profile. Spreading your
money around different tech stocks is not the same as spreading it
around different industries. If the tech industry takes a hit, the other
industries may bolster your investment portfolio.
2) Investing Without A Plan. If you fail to plan, you will plan to
fail! Investing without a plan is gambling — 22 percent of millionaires
regret not creating an investment plan. A good plan will help you set
goals, choose the right type of investments and stay disciplined.
Studies show that people with an investment plan will outperform those
who do not. Visit artofthinkingsmart.com for sample plans.
3) Making Emotional Decisions. About 20 percent stated that emotional
investing decisions have been their biggest mistake in the past.
Emotional investors buy when things are going well and sell when things
are going bad. This is the opposite of what they should be doing.
Sticking to your plan and working with a financial adviser will help
prevent emotional decisions.
4) Failing To Review A Portfolio. Sixteen percent said they failed to
regularly review their financial plans and portfolios. As the market
changes, investors should review and rebalance on a regular basis. As
your goals, time horizon and risk changes, you will need to adjust your
investments to be in line with your updated investment profile.
5) Fixating On Previous Returns. Fourteen percent said they relied
too much on historical returns and not enough on future expectations.
Just like an athlete who may have had a good season in the past, it
doesn’t necessarily mean he or she will do well this season. It can be
one criteria, but it should not be the basis of your investment
decision. Studies have shown that many mutual funds that were in the top
percentage of their category were in the lower performance categories