Investing: 8 mistakes you may be making

March 4, 2005

Investment advisers talk about the most common—and costly—blunders. How many do you commit?

When it comes to investing, you don't have to mess up big to be a big loser. The most innocent mistakes can end up costing plenty in the long run. Surely you know to delete the "send-us-money" e-mail scams, and you've heard about the dangers of hedge funds. But what about the all-too-common oversights that sink the earnings of even the most intelligent investors?

Recently, the CFA Institute polled its members (investment advisers who've met the requirements to earn the Chartered Financial Analyst designation) about the most common-and costly-investing mistakes. We've summarized them below.

Take the time now to review these blunders and follow up with the corrective measures the financial professionals provided. Then for a list of related Medical Economics articles that will keep you moving in the right direction.

2. Ignoring risk. Since there's no such thing as a risk-free investment, you need to be fully aware of how much risk you can handle. Don't wait until your portfolio starts losing value to start thinking about this. Do it now, assessing the potential impact a real loss would have on both your portfolio and your sleep. Once you've got a good handle on your need, ability, and willingness to take risk, you'll be more likely to make decisions that you're comfortable with in the long run.

3. Doing nothing. Lack of attention translates to lack of returns. Obviously, you won't earn a penny if you never get around to starting a program in the first place. Find a good financial adviser, and delay no longer.

If you have started an investment program, but you've ignored it since its inception, it's time to take a look. Review your program to see if it still adheres to your overall investment strategy, and make any necessary changes in your asset allocations. If you haven't put a penny in since the beginning, start an automatic savings program through your checking or savings account. With little effort, you'll be rewarded through the magic of compounding.

4. Investing in just a few stocks. Diversification is necessary to protect yourself in a volatile market. If you've put all your eggs in just one or two baskets, you're leaving yourself open to dwindling portfolio values if the market takes a hit. If, instead, you maintain an investment program that's diversified across asset classes and investment styles, you're less vulnerable to fluctuations in specific sectors or individual stock issues. Mutual funds are the best way to own a wide array of investments with a single purchase.

5. Buying on insider tips. Doing this is akin to your patient demanding to be put on a new drug based on a Web chat room discussion. Investors are foolish to believe that "new" information they've come across is truly new, or that they're the only ones being made aware of it. Besides which, trading on true "inside information" is illegal. When genuinely fresh information is released about a stock, it's quickly factored into the market price, making any killing nearly impossible except for the most seasoned professionals.