You don’t have to be a rocket scientist to create an investment plan that works. There are only a handful of important decisions to make, and each of them is simple enough that anyone can make them well.
No matter how much money you have or how much you know about investing, you CAN use investing to help you reach your biggest personal goals.
But there are also some common investment mistakes that hold many people back, and in this post we’ll uncover what those mistakes are and how you can avoid them.
1. Not defining your goals
“If your financial plan is based primarily on money you will regularly find yourself disappointed with the results even if you hit your numbers.” –Brandon Marcott
Investing is not an end in of itself. Better returns and bigger account balances won’t make you happy unless you have something meaningful to use that money for.
Remember that money is just a tool that, when used well, can give you the freedom to live a life you enjoy. Keeping the focus on those life goals will help you make better investment decisions.
2. Not saving enough
It’s common to think that the key to investment success is having the perfect investment strategy. You have to use the right accounts, pick the right funds, and maximize your investment return so that your money grows like you want it to.
And while those things do matter, they pale in comparison to the simple decision about how much to save.
The truth is that for the first 10 years of your investment life, your savings rate is FAR more important than your return. So if you’re serious about reaching those personal goals, spend less time trying to create the perfect investment plan and more time figuring out how to save more money.
3. Missing out on free money
Speaking of saving more, there’s an easy way to do it that many people miss.
If your employer offers a match on your 401(k) or 403(b) contributions, that’s FREE money right there on the table for you. All you have to do is contribute a little bit yourself and that money is yours.
That employer match is an immediate and guaranteed way to increase your savings rate by 50-100%. You won’t find a better deal anywhere else, so make sure to take full advantage of it.
4. Paying too much
Costs can kill your returns, and the unfortunate truth is that many investment companies do their best to hide their fees behind complicated terminology and lengthy fine print that make it hard to understand just how much you’re paying.
There are costs to buy funds, to sell funds, and to own them. There are taxes. There are administrative fees.
All of these costs eat into your returns and make it harder for you to reach your goals.
But there’s good news here. Cost is one factor that you have a LOT of control over, and doing your homework to understand which costs to look out for and how to minimize them will do a lot to improve your results.
5. Investing in things you don’t understand
From my experience, most people who are frustrated with a particular investment they own didn’t totally understand it when they first got in. Someone told them how great it was going to be, so they put money into it without a strong idea of what it was and how it worked.
You should never feel pressured to invest in any particular product, and there are some good reasons to completely avoid anything you don’t understand:
- If you don’t understand a particular investment, it’s impossible to know whether it’s really helping you reach your personal goals.
- The best investment strategies are usually simple. The more complicated investments are often better for the salesman than for you.
- The less you understand something, the less likely you are to stick with it (see mistake #8).
Investing doesn’t have to be complicated to be effective. Simple and understandable usually leads to better results.
6. Investing too aggressively
Conventional wisdom says that people in their 20s-40s should be investing very aggressively with most of their money in the stock market.
There’s plenty of good logic behind that reasoning. But the truth is that emotions are just as big a part of investing as logic, and those emotions need to be considered.
The risk of being too aggressive is that you lose more than you’re comfortable losing the next time the market falls, bail on your plan, and potentially shy away from investing altogether in the future.
A better approach is to pick an investment strategy you’re comfortable with, even if it’s more conservative than conventional wisdom would suggest. That way you’re more likely to keep a consistent course, which is one of the biggest keys to long-term success.
7. Investing too conservatively
On the flip side, I also see people who are invested far too conservatively.
Your savings account balance will never fall, but that money WILL constantly be losing value to inflation. Over short periods of time this isn’t a big deal, but over long periods of time it matters a lot.
So if you’re investing for the long-term, having some significant portion of your money in the stock market will give it the oomph it needs to really grow.
That extra growth will make it easier to reach your goals.
8. Bailing on your investment plan
Here’s a simple but hard-to-accept truth: you are never going to have the perfect investment plan.
You won’t have it because it doesn’t exist. No one knows what the markets are going to do, so no one knows exactly the right way to invest.
That uncertainty can make it hard to stick with your plan. When the market is going up, you feel like you should be more aggressive. When the market is going down, you feel like you should be more conservative. And when you learn about someone else’s investment strategy, you feel like you should be doing something more like them.
It’s a constant battle. And the absolute worst thing you can do is give in to the temptation to change your strategy.
There’s a phenomenon called the behavior gap. It shows that individual investors typically get worse returns than the funds they invest in, and a big reason for that difference is the tendency for investors to get in and out at the wrong times as they constantly tinker with their plans.
You can avoid the behavior gap simply by picking a plan and sticking to it, even when it’s hard. In the words of Warren Buffett: “Benign neglect, bordering on sloth, remains the hallmark of our investment process.”
9. Thinking you don’t have enough money/knowledge/time to invest
Investing isn’t just for rich people. It isn’t just for people with a PhD in finance or for people who spend all their time pouring over financial reports.
You can start investing on any budget.
You can invest well by making just a few good decisions.
And you can do it all without having to spend a ton of time on any of it.
It will take a little bit of time to learn the basics and get your plan in place. But once you’ve done that initial work, the long-term maintenance is actually pretty minimal.
ANYONE can create an investment plan that not only helps them reach their biggest personal goals, but that they understand and believe in.
Don’t sell yourself short. If you have long-term goals that matter to you, it’s worth getting started now.