3 Biggest Mistakes In Investment
Investment is a game of high stakes. However, knowing what the three biggest mistakes are can help you avoid substantial losses.
Probably the biggest mistake is simply not starting to invest sooner. Time is not on your side when choosing an investment strategy. While you can retire later or move deadlines, you can never go back in time to when you should have started investing. And because you can never travel back in time, there is no better time to invest than right now. The reason for this is compound interest.
Compound interest occurs when your gains start earning more profits. This means that you aren’t only relying on your original investment but that your money actually starts working for you. However, this is often the time when investors get greedy and opt for returns that they think might provide greater returns, which brings us to the second biggest mistake in investing.
2. Chasing Greater Returns
The next big mistake is not being satisfied with the returns you are receiving and always chasing that bigger and better bet. When Money Magazine published its “Best 50 Mutual Funds”, it became difficult for many to resist the temptation to chase larger investments. And although a fund that has made 25% in returns over the past three years may look incredibly attractive, what you aren’t seeing is the difference between fund returns and investor returns.
Buying on advice from publications or family and friends means that you are chasing returns. And when the investment doesn’t deliver, selling and moving on the next hot pick can become a vicious cycle that can have negative results.
For example, a presentation by a well-known research company for financial advisers that went a long way to confirming my thoughts on this. Although I can’t provide the data from the presentation as it is yet to be approved for the public, I can give you the information from an article published by Kiplinger magazine that cites statistics from Morningstar. The article headed “Your Real Total Return” states that “Investors earnings are often far less than the reported gains of the fund, especially when it comes to volatile funds.”. The article does a great job of illustrating this point that many advisers debate with their clients when the markets start getting hot.
The choice of assets that form part of the investment or asset allocation forms the greater part of investment return – upwards of 95%. Gary P. Brinson, L. Randolph Hood and L. Beebower revealed this in an unprecedented paper titled “Determinants of Portfolio Performance” that was published in 1986. Funds that form part of the asset location portion of your investment portfolio should therefore provide decent returns as long as they have low volatility to avoid investor anxiety according to the Klipinger article.
Many investors make the plain error of paying too much for an investment. Greater returns come from reducing expenses. And I am not the only one who believes in the theory. According to John Bogle, founder of Vanguard, the fastest way to the top performance quartile is to be in the bottom of the expense quartile. Of the 57 funds that have been running between 1981 and 2001, the Vanguard 500 Index Fund, has tied as the 7th best performer for that period.
For investors who are chasing returns, their best bet would’ve been to invest in any of the seven funds that beat Vanguard. However, you would need to hold on to that investment for a period of 20 years which may be difficult for the return chaser.
So how can you avoid making one of these three big mistakes in investing?
Lower Your Costs
A business expert Rapid Biz states. “Choosing allocations in low-cost index funds can help reduce your investment costs. Although these will probably never give you the returns related to paper, over time, the reduced expenses will prevent you from ever falling into the bottom quartile. You may not be getting the best returns, but you will certainly have peace of mind about your return on investment”.
An excellent way to avoid procrastinating is to have a plan in place. Research shows that an investment plan laid out in black and white improves your chances of increased funds at retirement. A good program allows you to focus and holds you accountable. You can refer to it as needed and make adjustments as necessary.
Trust asset allocation instead of chasing returns. Asset allocation has historically proven returns of over 90% of your investment portfolio. Remember that the odds are against you if you are chasing investment returns. Visit Aussem Mortgage Solutions find out more about asset allocation.