As a financial advisor, I often have people come in who’ve made mistakes with their money and investments. Here are a few of the most common investment mistakes that you should strive to avoid.
1. Investing in a company when you don’t understand their business model
You can’t make an educated decision to invest in a company if you don’t understand their business model. Instead, it’s likely that you’re jumping on the current “hot stock” or gambling rather than investing. You should understand the business models of the companies that you invest within so that you’re choosing a company where you know your money is more likely to grow.
2. Investing in a single asset
Diversification is one of the most basic and important principles of smart investing. Typically when you invest in multiple assets you are protecting your money from market volatility.
When you invest in a single asset you’re putting all your (nest) eggs in one basket. Remember that you can diversify your portfolio while still optimizing it for your preferences of growth or income.
3. Taking out a loan on your 401(k)
According to a study by HelloWallet, of the $249 billion contributed to 401(k) plans in 2012 – 2013, about 24 percent, $70 billion, was withdrawn for non-retirement purposes. Many people seem to lose sight of the purpose of this money which is to provide a comfortable retirement.
When you take out a loan from your 401(k) you can be penalized in many different ways including added interest and fees, and you’ll most like have your contributions to your 401(k) suspended while you’re repaying your loan. This means that during the time that you’re repaying your loan the money that you pulled out will miss out on the power of compounding and any market growth. In addition to all of this, your loan repayment is taken out of your paycheck, and it may cost you more than what your 401(k) contributions had cost you beforehand, so you monthly cash flow might be negatively impacted.
4. Investing more than 10% of your total assets into your friend’s business
Generally speaking, you don’t want to put more than 10% of your total assets into a more long-shot type investment. The reality is that businesses fail every day, so you don’t want the majority of your wealth or your retirement tied up in an unproven business. That’s not to say you shouldn’t invest in your friend’s well thought-out and hopefully proven business strategy; however, we recommend you pull money from your Opportunity Fund when an investment like this becomes available to you.
5. Not saving and investing money for retirement sooner
It’s common knowledge now that the earlier you start saving for retirement, the less money you actually have to put away each month. You’re giving yourself more time to leverage the power of compounding. This wish goes hand in hand with the ancient proverb, “The best time to plant a tree was 20 years ago. The second best time is today.” If you haven’t gotten started investing for retirement yet, consider this your wake-up call. Get started saving today!