6 Common Investing Pitfalls - And How To Avoid Them

Investing is a great way to build wealth, but it can also be risky if you don't know what you're doing. There are many pitfalls to avoid when investing, and making the wrong decisions can cost you a lot of money. Here are 6 of the most common investing pitfalls we see, and some ideas on how you can avoid them.

1. Chasing Hot Tips

One of the biggest investing pitfalls to avoid is chasing hot tips. Some recent examples include cryptocurrency and meme stocks. It can be tempting to follow the latest investment trends or to invest in a stock that a friend or family member (or the internet) recommends. However, this can be a dangerous strategy. Hot tips are often based on rumors or speculation - not based on sound financial analysis. We typically recommend only keeping a small portion of your portfolio in investments like these. Consider companies that have strong balance sheets and have demonstrated consistent earnings growth. You’re putting your money with them, and you want to make sure you get rewarded for the risk you’re taking as a shareholder.

2. Not Diversifying Your Portfolio

Another common investing pitfall is not diversifying your portfolio. Investing all your money in a single stock or industry can be risky because if that company or sector experiences a downturn, you could lose your principal. To avoid this pitfall, diversify your portfolio by investing in a mix of stocks, bonds, and other assets. This will help you spread your risk and minimize your losses. The right mix of stocks, bonds, and alternative investments will vary based upon on your age, time horizon, experience and goals, so be sure to consider these factors carefully.

3. Timing the Market

Trying to time the market is another investing pitfall to avoid. It can be tempting to try to buy low and sell high, but this is very difficult to do consistently. Even the most experienced investors can't predict market movements with certainty. Instead of trying to time the market, focus on a long-term investment strategy and stick to it.

4. Ignoring Fees and Expenses

Investing fees and expenses can eat into your returns over time. It's important to understand the fees associated with your investments and to minimize them where possible. Look for low-cost index funds or ETFs that have low expenses. In doing your research, the key term you want to look for expense ratio. It will typically be expressed as a fractional percentage. For example, “.50”, “0.50%”, and “50 bps” are all common ways to say your portfolio will be billed one half of a percent of your account value per year. If you’re in a fund you like, you can also look for different share classes that may be lower cost alternatives.

5. Panic Selling

This one goes hand-in-hand with timing the market. When the market experiences a downturn, it can be tempting to panic and sell your investments. However, this is usually not a good strategy. Markets tend to rebound over time, and selling at the bottom of a downturn can lock in losses. Instead of panic selling, focus on your long-term investment strategy and stay the course.

6. Failing to Rebalance Your Portfolio

Failing to rebalance your portfolio can be a costly investing pitfall. Over time, your portfolio may become over-weighted in certain assets or sectors. This is because some sectors or styles may experience periods of stronger growth than others. This “overweighting” can increase your risk and reduce your returns. To avoid this pitfall, regularly review your portfolio and rebalance it as necessary to maintain your desired asset allocation. It’ll also ensure that you buy low and sell high by carving off some of your gains from strong-performing funds and purchasing weaker-performing funds at a lower cost. A note of caution: don’t forget to consider expenses that may be incurred, such as short-term trading fees on funds held for fewer than the time stated in their prospectus, or brokerage commissions charged by the firm you’re using.

There’s no question about it: investing is a phenomenal way to build wealth. However, these common pitfalls are to be avoided if you don’t want to expose your portfolio (and your financial future!) to undue risk. By doing careful research, diversifying your portfolio, focusing on a long-term investment strategy, minimizing fees and expenses, staying the course during market downturns, and regularly rebalancing your portfolio, you can maximize your returns and achieve your financial goals.

Disclosure: Investing involves risk, including the potential loss of principal. The information provided in this blog post is for educational and informational purposes only and should not be construed as professional financial advice. Consult with your financial professional before acting on any information discussed in this article and consider all taxes, fees and expenses.