It seems that more than ever, knowing what not to invest in is just as important as knowing what to buy. The reality is that with the constantly changing world economy, it is important to work closely with your financial advisor to determine the best investments to make, given your financial situation and your long- and short-term goals and needs.
Here the four most common mistakes that new investors in the market or those who only dabble in the market are likely to make. By becoming aware of these issues, you can make choices to avoid the most basic pitfalls.
- Self-management – While many Americans have that streak of independence that is such a part of the cultural identity, it is not a good trait when it comes to investing. This is a science and a process that requires a full understanding of risks, returns, inflation, and interest rates. If you don't routinely follow the markets or are relatively lost when it comes to understanding an investment from all angles, hire a financial advisor to provide you with the information.
- Overpaying fees – It is critical to evaluate what your financial advisor or planner is charging and understand how you can minimize those charges. Paying additional fees, hidden costs, or excessive service fees will eat into your investment over time. However, it is important to compare the fees for the services you are receiving. A low-cost fee to a poor investment professional or an automatic service may not offset the cost of a slightly higher fee to a proven professional.
- Lowering risks with age – As people age and reach retirement, it is important to evaluate risk levels and modify accordingly. Generally, the closer to retirement people get, provided they have modest retirement savings, the lower the risk of the investment should be. This protects against sudden turns in the market that can have significant short-term negative impacts.
- Not seeing the big picture – Sometimes when a financial planner or advisor is not involved in the process, individuals tend to focus only on the short term. Having the advantage of stepping back to take a big-picture look is a critical part of an effective investment plan.
Remember, investing is not a short-term plan but rather a long-term investment to provide for wealth in the future. Working with a financial planner you trust can help you to develop an investment program that is just right for your needs.