Six Investing "No-nos"
- By:
- Catherine Brock | August 30, 2007
Hone your investment practices and optimize your returns by learning what not to do with your portfolio.
In the art form known as investing, some create masterpieces, while others struggle to draw a recognizable stick figure. If you're new to investing, or if your returns aren't what you want them to be, sharpen your pencil and get ready to review some common investing mistakes.
There's a fine line between investing and gambling. Acting quickly on a neighbor's hot stock tip is gambling; making strategic, well-researched stock purchases is investing. Gambling is high risk; investing is controlled risk. You don't need to be a financial whiz to formulate an investment strategy, but you do need to clarify your goals and objectives. Ask yourself the basics: Why are you investing? What's your savings goal? How much time do you have to invest before retirement? What's your risk tolerance? How much time can you spend researching stocks and managing your portfolio? How can you keep your portfolio balanced among economic sectors and investment types? Can you do it yourself or should you enlist the help of a financial advisor? The answers to these questions will help formulate your strategy, which will guide your decision-making.
Some investors make the mistake of buying into trendy stocks after their prices have swung upward, under the assumption that the gains will keep coming. Stock prices, however, are subject to short-term spikes and declines; buying at the peak price can easily set you up for a loss.
The brokerage fees associated with short-term trading can add up quickly and start eating away at your principal. Plus, it's impossible to predict the future with a high percentage of accuracy. Keep your money in securities that you can hold for the medium- and long-term.
Cash, over time, earns lower returns than stocks or bonds. If you're letting cash balances from dividends and interest payments pile up, you could be missing out on profits.
Accept that you'll have losses. If an investment doesn't work out as you expect, you don't have to sit on it until the value swings upward again. Find out why the value is down and decide if this position is going to be a short-term or long-term holding. If the company's CEO has been arrested for bank fraud, for example, you can bet there are other problems on the horizon. Get out of that security and put your money to work elsewhere.
Don't avoid taking profits just because you don't want to pay the taxes. Instead, focus on the bottom line: The only reason that you're paying taxes is because you've already made money, and that's a good thing.
Do you still have that pencil? Use it to start sketching out your financial goals. That's the first step towards creating your own financial masterpiece.
In the art form known as investing, some create masterpieces, while others struggle to draw a recognizable stick figure. If you're new to investing, or if your returns aren't what you want them to be, sharpen your pencil and get ready to review some common investing mistakes.
Overly spontaneous
There's a fine line between investing and gambling. Acting quickly on a neighbor's hot stock tip is gambling; making strategic, well-researched stock purchases is investing. Gambling is high risk; investing is controlled risk. You don't need to be a financial whiz to formulate an investment strategy, but you do need to clarify your goals and objectives. Ask yourself the basics: Why are you investing? What's your savings goal? How much time do you have to invest before retirement? What's your risk tolerance? How much time can you spend researching stocks and managing your portfolio? How can you keep your portfolio balanced among economic sectors and investment types? Can you do it yourself or should you enlist the help of a financial advisor? The answers to these questions will help formulate your strategy, which will guide your decision-making.
Chasing gains
Some investors make the mistake of buying into trendy stocks after their prices have swung upward, under the assumption that the gains will keep coming. Stock prices, however, are subject to short-term spikes and declines; buying at the peak price can easily set you up for a loss.
Trading for the short-term
The brokerage fees associated with short-term trading can add up quickly and start eating away at your principal. Plus, it's impossible to predict the future with a high percentage of accuracy. Keep your money in securities that you can hold for the medium- and long-term.
Sitting on cash
Cash, over time, earns lower returns than stocks or bonds. If you're letting cash balances from dividends and interest payments pile up, you could be missing out on profits.
Sitting on investments
Accept that you'll have losses. If an investment doesn't work out as you expect, you don't have to sit on it until the value swings upward again. Find out why the value is down and decide if this position is going to be a short-term or long-term holding. If the company's CEO has been arrested for bank fraud, for example, you can bet there are other problems on the horizon. Get out of that security and put your money to work elsewhere.
Avoiding taxes
Don't avoid taking profits just because you don't want to pay the taxes. Instead, focus on the bottom line: The only reason that you're paying taxes is because you've already made money, and that's a good thing.
Do you still have that pencil? Use it to start sketching out your financial goals. That's the first step towards creating your own financial masterpiece.
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