Investors, investment advisors, and professional investors all make mistakes. I have listed some of the most common and expensive mistakes below. These mistakes can end up costing investors a fortune over time due to the power of compounding. Small mistakes now end up costing a great deal of money over time. Numerous studies have shown that the average investor often ends up with only about half of the return that is available in the markets (or worse). This big shortfall is due to mistakes like these:
1. Trading too much. Being too short-term oriented.
2. Chasing performance (buying high). Investors seem to get most interested in an investment after it has already performed great for several years in a row. Those are certainly the investments/funds that get advertised most and talked about in the media. By doing this investors are getting in late and at high prices. Investment inflows into certain products tend to peak right near the top of a big move (remember all the inflows of investment into technology/internet stocks and funds at the peak of the last investment bubble?) Today investors buying emerging markets and Chinese stocks could be considered "chasing performance".
3. Ignoring expenses. Investing in high-cost products.
4. Not saving enough/Spending too much. Saving more or spending less is the most certain way to increase your portfolio year after year.
5. Too much risk or too little risk. Both can be costly to the long-term health/growth of your wealth. Too little risk often results in a portfolio lagging behind inflation over time.
6. Undiversified. Many investors are not diversified enough across a broad cross-section of asset classes.
7. Paying too much attention to "experts" in the media and short-term market "noise".
8. Ignoring the tax implications of investing.
9. Unrealistic expectations and overconfidence. Most investors think they are better investors than they really are. Many also still seem to think they should get 15%-20% a year in the markets (and unfortunately some plan on that for their retirement). They remember their winners and selective memory helps them forget all their bad investment decisions. Investing always seems easy when the markets are going up.
10. Not having an investment strategy, or not sticking with their plan. Many investors are just "winging it" when it comes to their portfolio. Inertia/fear keeps them from getting rid of bad investments and from coming up with a good long-term strategy and financial plan for their future. This is a critical mistake. "If you don't know where you are going, you probably won't get there".
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