The Four Biggest Mistakes Investors Make

Posted on February 10, 2021

Whether you’re new to investing or have been carefully planning your financial future for years, it’s possible you’re making at least one of the four biggest mistakes an investor can make. Sometimes we act out of fear, or because we just don’t know. Either way, making these mistakes means you’re leaving money on the table, or paying too much for certain services. 

To get the most out of your long-term financial planning, don’t do the following:

  • Holding Cash
  • Timing the Market
  • Ignoring Liquidity
  • Failing to Understand the Product

Holding Cash

We hear about saving, saving, saving our money, usually from the time we’re youngsters. And saving as much money as possible is smart, especially when you bank those savings or put them into your investment funds. 

Cash is a different story. Today, we use apps, cards, and online accounts for financial transaction and often don’t handle actual physical cash, but the monies in your accounts that aren’t going to pay for your monthly living expenses, and that aren’t set aside for your emergency fund (which is very important to have), should not just be sitting in a bank. 

Socking away cash is, in reality, a bad idea.

Banks pay practically nothing in interest these days. And they’re all about profit to begin with. In fact, putting your money credit unions is a more solid approach to money management than banks because credit union offer the same products and services but usually at lower fees.

Don’t let your cash sit in a bank earning practically nothing. Here’s why. Your money, over time, won’t be able to buy as much in the future because of inflation. 

For example, let’s say you have $20,000 cash sitting in the bank. In ten years, or twenty years, your money will still be around $20,000, but by then the price of goods will have increased, due to inflation, and your money won’t buy nearly as much. 

Inflation erodes your buying power over time. Set aside any fears you might have of putting money into the market. And invest soon with an advisor you trust. Don’t get stuck in paralysis by analysis; the longer you hold your cash, the more money you lose. 

Timing the Market

Some people think it’s possible to buy just as the market is about to rise, or to sell just before it declines. That’s called timing the market and no one is able to do it. You might even say it’s a myth, which we’re busting.

Markets rise and fall because of many factors, some rational, but many not. We can analyze some market movements and understand them, and others we simply cannot know what caused them. Plus, trying to hit the sweet spot of buying or selling to time the market can generate unnecessary transaction fees.

 What we do know for sure is that the markets will go up and down, but over the long term, they go up. Short-term volatility varies in degree and is to be expected. No need to panic when markets fall, even precipitously. They come back. 

The most efficient approach to investing is to buy and hold. Sounds boring, but it’s effective. Your portfolio will be rebalanced periodically to keep your preferred mix in suitable proportion. Your preferred mix of diversification will have been pre-set, based on your level of risk aversion, time in the market, etc. 

Buying and selling within your portfolio will be based on your personal preferences and your advisor’s guidance, not by a bullish or bearish market reaction.

Ignoring Liquidity

Liquidity means you can sell your assets relatively easy when you need to. And it’s normally easy to know the risk you might incur so you can weight that against the reward you might experience when selling.

Assets like real estate, livestock, antiques, collectibles, art, or even crypto-currencies like Bitcoin, are not commonly traded securities (stocks, bonds, etc.). Because they are not common, the number of buyers interested in them is limited. So when you decide to sell, your opportunity to make or lose money will depend on the number of potential buyers, and how much they’re willing to pay.

It’s difficult to determine the risk versus reward of investing in an antique or collectible, an aged bottle of wine or herd of cattle, unless you or your advisor are experts in those areas. For every investment, you want to know if the returns you might get on the investment is a good trade-off for what you could lose from the investment. 

Not all investments in tangible goods gain value over time. That’s why you don’t want to ignore liquidity. You must consider how easy will it be, and the value you will earn from selling that item down the road. 

Failing to Understand the Product

Investments like permanent life insurance, financial derivatives (options, swaps, collateralized debt, etc.), annuities, and even some mutual funds, are complicated. Each of these can serve a need, and they can serve the kind of need you have but navigating them can be a complex process. 

The more you know, the better you’ll know what you’ve invested in. And if it’s what you need. Your advisor should be transparent with you about any of the products they recommend for you. They should help you understand the exact need the product will meet for your specific plan. 

If you’re not working with an advisor, you can do the research yourself, though it will probably be confusing, which is why an advisor is your best bet for wealth management and financial planning. A trusted advisor will know the ins and outs of all products, as well as the markets. 

An advisor will build a portfolio based on your long-term financial goals. Work with a Registered Independent Advisor (RIA) who will be a fiduciary acting in your best interests (not to receive a commission).

Avoiding Mistakes

These four mistakes should be easy to avoid now that you’re aware of them. Here are the things you’ll want to be sure of when considering investment options:

  • What the investment does
  • Whether you need or can benefit from what the investment does
  • How much it will cost you to meet that need or obtain that benefit

Investing can be complicated. You probably have other things you want to focus your time and energy on. Hiring a trusted wealth advisor means you pay them a set fee to manage your wealth so you can go make money doing the work you love. 

Whether you work with an advisor or not, don’t leave any money on the table, or over pay for services, when it comes to your investments and your future. 

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