Written by TIAA-CREF | TIAA CREF Financial Servces
Even if you are an expert in your field, you may not feel so knowledgeable when it comes to investing your money. The good news is that you can avoid many common investment mistakes if you know to watch out for them. To do that, you may need more information, a professional opinion from a financial advisor—or simply to become more aware about how your emotions may be taking charge of your finances.
Avoid these common investing mistakes:
1. Market timing
If you constantly choose investments based on yesterday’s top performer, or abruptly sell investments based on the daily news, you may end up hurting your investment returns. Many studies—including a 2014 report from financial research firm DALBAR, Inc.—have found that individuals who buy and sell stocks on their own often generate lower returns than if they had just purchased and held a Standard & Poor’s 500 Index Fund. Dalbar cites investor tendency to sell when markets fall and buy when markets rise again, underscoring the need to stick with a consistent investment strategy. So make a long-term investment plan and stay the course.1
How to avoid making investment mistakes:
2. Emotional decisions
Financial markets generally rise and fall without warning, soaring one day and dropping the next. If this volatility makes you nervous enough to change investment choices often —or move too much money into safer positions—you could end up managing your money too conservatively. The risk: Your savings may not have the opportunity to grow to the amount needed to cover your retirement or other long-term costs. Watch out, too, for overly optimistic emotions that can make you buy or stick with investments that did well for you in the past, even if they’re underperforming today. Don’t let fear or greed overtake your focus on the bigger picture.
3. Ignoring tax consequences
Taxes can take a big bite out of your investments—both now and during retirement. While you are working and saving, be aware of your tax bracket and how tax consequences impact your total return in each account. If you have many years until you need to access your money, try to make sure that high dividend paying stock funds, bond funds, and funds that generate significant capital gains are held in a Traditional IRA, Roth IRA, or employer-sponsored retirement accounts that can shelter gains from taxation.
In accounts where your earnings will be taxed, such as a brokerage account, consider investing in mutual funds with low asset turnover, as well as mutual funds, ETFs, and stocks that pay smaller dividends. If you are in a higher tax bracket, check with your advisor to see if investing in municipal bonds or municipal bond funds makes more sense than taxable bonds.
Taxes matter when you are retired as well. For instance, you will not pay taxes on the returns generated within a workplace retirement plan such as a 403(b) or 401(k) during your working years. However, you’ll need to plan for paying taxes on those savings when you withdraw money in retirement. An advisor can help you craft an income plan in retirement that takes your possible tax bill into account.
4. Holding losers too long
It’s human nature to avoid the discomfort of facing a mistake—such as having invested in a stock, bond, or mutual fund that is losing value. Instead of biting the bullet and selling the investment at a loss, you may hold on—hoping the investment will rebound or at least get back to the price at which you bought it. A better strategy: Decide in advance the point at which you’ll sell an investment if it drops in value. Also, ask yourself why you made the investment: Was it because it was rising in value? Recommended in the press? Or were you trying to diversify your portfolio? Understanding your rationale behind investment decisions can help you avoid similar mistakes in the future and solidify your decision to sell.
5. Overreacting to rising interest rates
Interest rates have been at historic lows since 2008, when the Federal Reserve—which sets short-term interest rates—pushed down the cost of borrowing to spark economic growth after the Great Recession. With the economy growing, the Fed is likely to push short-term interest rates higher. That could cause short-term stock market volatility and depress bond prices, as rising interest rates tend to push bond prices lower.
It’s important not to overreact to any market volatility. If you have a long-term financial plan in place with your assets diversified broadly across stocks, bonds and real estate, you are likely to be well-positioned as interest rates rise. To learn more, read Rising interest rates and your investments .
6. Flying solo
You can handle many tasks on your own — from home repairs to lawn maintenance. However, financial planning probably shouldn’t be one of them. A financial advisor can help you assess whether you’re on track to meet financial goals, and identify investment options that fit your circumstances. A financial advisor can help make sure your asset allocation among stocks, fixed-income and other investment types is right for you. He or she can also help you regularly rebalance your allocation so it keeps up with market changes and your needs.
Fortunately, financial advice may be available through your workplace plan. Choose an advisor who offers advice that’s personalized to your situation and risk tolerance. Ask your advisor how she is compensated — which generally includes commission-based, fee-only or a mixture of fee-and-commission based.
Investment help can come in forms other than a face-to-face advisor meeting. Help can also come through online webinars and investment products. For example, if you don’t feel comfortable handling your own assets, a managed account can help. With a managed account, investment professionals create and monitor your portfolio day in and day out on your behalf, taking into account your stage of life, your risk tolerance and personal preferences such as whether you’d like to invest in socially responsible funds or companies. Managed accounts free you from the pressure of making complex investment decisions on your own. There is usually a fee for managed account services.
1 Dalbar annual Quantitative Analysis of Investor Behavior (PDF), 2014 edition .In the Dalbar study, individuals who have invested in stock funds have earned 5.02% annually over the past 20 years, versus a 9.22% annual return for the Standard & Poor’s 500 Index fund. Past performance is no guarantee of future results.