5 Investment Mistakes to Avoid
Investing in the stock market can sometimes feel like a roller coaster ride. As stock prices move up and down, the effect on your portfolio can have you riding high one day but feeling low the next. When speaking with clients, we like to keep them in the loop about some of the common mistakes we have seen when it comes to riding out these highs and lows.
Below, we listed 5 investment mistakes that we always implore our clients to avoid:
1)?Emotional Investing: Investing with emotion can be one of the most critical errors one can make when it comes to their portfolio. You may see a large market downturn and think you have to sell out of every stock and hold onto your money or conversely have FOMO and invest in a stock that is hitting all time highs and you wind up getting in at the top.
When we speak with clients about these concerns we always go back to their financial plan. How is the overall health of the plan going, should we adjust something mindfully and try to see how the current situation continues to play out without coming to some brash decision?
When panic selling occurs, many investors resort to trying to “time the market” on when their new entry point should be once they feel like there is an opportunity to reinvest their money. This type of buying generally does not work out and you can miss out on some of the potential gains the stock has made if you did not get back in at the right time.
Sticking to your plan is key here. Understanding that there will be times of market volatility and persevering through them can help keep you on track with your financial journey.
2)?Tax Inefficient Portfolio: When creating your portfolio, it is important to understand the tax implications of your investments. This includes common themes such as long term and short term capital gains as well as not properly preparing for passing on your legacy.
As you may know, short term capital gains are ones in which you have a realized gain on an investment that you held for less than a year. These short term gains are taxed at your ordinary income rate. Long term capital gains are ones in which you have a realized gain on an investment in which you held for longer than one year. This investment is taxed at a maximum of 20%. Understanding this paradigm can help you better prepare for a taxable event.
In terms of passing on your legacy, not having a proper estate plan in place can cause some major tax implications for your heirs. Creating a trust, whether revocable or irrevocable, can help to mitigate some of the taxes that would be passed onto your heirs after your passing.
It is important to work with financial, tax and legal professionals to properly guide you in your specific situation.
3)?Over concentration in securities: Not having a properly balanced portfolio can leave it open to concentration risk. In finance there are two different types of risk that many analysts look at when evaluating companies and portfolios: these are systematic risk and nonsystematic risk.
Systematic risk is another name for market risk. Here, this risk is measuring how much the overall market performance is affecting a portfolio. Nonsystematic risk can also be considered business risk. This is risk that is inherent for a specific company. These types of risks can include a bad CEO, legal action taken against the company or potential for bankruptcy.
Having a portfolio where all of your investment is in one or two companies can open it up to these nonsystematic risks. Properly diversifying your portfolio to have an adequate amount of risk that is fit for your financial plan should always be considered when you are choosing your investments.
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4)?Too much turnover: Constantly buying and selling securities in hopes that you will earn an outsized gain to those who are buying and holding securities is another investment mistake that we encourage clients to avoid. On top of the tax implications that you can create for yourself by having a minimal holding period on your investments, trying to time the market is never in an investors best interest.
From a wealth management perspective when you are trying to build your wealth overtime, it is important to create a robust financial plan that aligns with your goals. In that plan, you choose investments that make sense for you and then deploy your money to those investments.
5)?Failure to monitor your portfolio: Now in the last tip, we are not saying you should set your portfolio and forget it but rather choose investments that work for your plan and most importantly, monitor the health of how they are working for you. We have seen time and time again when bringing on new clients that they haven’t kept a close eye on their portfolio and are invested in companies that no longer align with their goals.
Making sure you or your financial professional always have a watchful eye on the economy, your investments and your goals is an important part of anyone’s financial picture.
The Final Word:
We hope that these 5 investment tips help you through your investment journey. Remember everyone’s situation is different and it is important to define your goals before implementing a strategy that can work for you.
We always suggest speaking with a financial professional when trying to build out your financial plan.
Thanks for reading! Do you have questions you would like us to discuss here? Click this link to let us know and we hope you found this helpful!
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Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Plainview, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
Rockline Wealth Management does not offer tax or legal services. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Real-life examples given in this blog should not be viewed as guaranteed outcomes when investing. Past performance is not indicative of future results and every individual’s investment circumstances are different. Individuals should consult their financial professional before implementing their investment plan.