Mistakes to avoid when wetting investing goals
A new year grants a fresh slate and the ability to reset your goals. It's easy to focus on your health, but this is also a time to review your current investing goals (and possibly set some new ones). It's great to have these goals - they help gu...
A new year grants a fresh slate and the ability to reset your goals.
It's easy to focus on your health, but this is also a time to review your current investing goals (and possibly set some new ones).
It's great to have these goals - they help guide your savings and provide motivation to continue investing throughout the year. Considering how complex investing is today, you are probably asking yourself where to begin when setting investing goals. Plus, it's easy to make mistakes when investing that could dramatically alter your results.
Avoiding these costly investing mistakes can help prevent you from feeling disappointed when reviewing your statements at the end of the year.
• Investing without purpose: Why are you investing? Is your sole focus to maximize your nest egg for retirement or do you have several long-term goals you're investing toward, such as your children's college costs? Are you investing for a shorter-term goal, such as a renovation on your home or this year's family vacation? If you do not know the answers to these questions, it is very difficult to create short, medium and long-term buckets to effectively manage your investments. Depending what you are saving for and how far away that goal is will dictate how much you need to save and where to invest these savings.
• Allowing emotions to dictate your decisions: It is incredibly difficult to make decisions about your money that are not affected by your emotions. Large gains in the markets can lead to overconfidence, while a correction may cause you to exit the market and stay on the sidelines for too long. Working with a financial adviser can provide objective advice and help take the emotions out of managing your investments.
• Chasing performance based on recent strong returns: If there's one rule to remember when investing, arguably the most important is "Past returns do not guarantee future returns." It's easy to look at the big winners from last year and assume those results will continue for the foreseeable future. The truth is that every year there are investments that performed very well one year, only to suffer significant losses the next.
• Forgetting to review your portfolio: Once you find your proper asset allocation, it is important to not make a habit of "setting and forgetting" your portfolio. Ignoring your holdings can lead to asset drift - the gradual shift in asset allocation as some asset classes outperform others. Over time, this could cause your portfolio to have a significantly different amount of risk than you originally planned for. Rebalance your portfolio on a regular basis in order to keep asset drift in check and help ensure you are not exposed to too much risk.
• Incorrectly benchmarking your returns: Once you have established your investing goals, how do you evaluate how well your portfolio is doing? The usual answer is to compare your results to a major market index. This is often a mistake; no single index is truly indicative of the health of the overall market. Plus, a single index is not likely accounting for a diversified portfolio. Consider this: If you have a portfolio of stocks and bonds, an index that only tracks stocks isn't accounting for bonds' performance. Instead, evaluate whether your investments are actually helping you reach your personal goals on time and if your investments reflect your risk profile and investment style.
These mistakes can easily trip up investors. Remember your goals and focus on the long term to help avoid having them derail your plans.
By Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at email@example.com . Securities offered through LPL Financial, member FINRA/SIPC.