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12 Dumb Moves Investors Make

12 Dumb Moves Investors Make

Investing is always a smart decision but like most things in life it is prone to human error and emotion which leads to poor decision-making and bad judgment. If done wisely, investing can lead to a comfortable retirement where you can enjoy your Golden Years by traveling and spending time with family and friends. Take care to avoid the most common mistakes investors make.

1. Not Investing

The most frequent and costly mistake is not investing at all. Either out of fear, ignorance or procrastination many individuals waste decades of potential returns by not being a part of the investment community. Even something as simple as setting aside $25 per month and placing it into a money market account is better than nothing and can make a huge difference over time.

2. Being Greedy

There is a common saying that investors should sell on greed and buy on fear. Market bubbles happen when investors get greedy and inflate stocks to the point where their values are unsustainable. Avoid becoming greedy by setting a sale price and sticking to it and by not purchasing "hot" investments to begin with.

3. Not Diversifying

Portfolio diversification is instrumental in limiting exposure and minimizing potential losses from market downturns. A properly diversified investment strategy will include stocks, bonds, mutual funds and real estate so if any one market segment suffers then the negative impact will hopefully be negligible.

4. Micromanaging

Just as most employees are less productive when supervisors micromanage their work, micromanaging your investments has proven historically to lead to lower overall returns. Investments should only be purchased for the long run since any fluctuations in price tend to flatten out over time. A buy-and-hold strategy almost always leads to better returns than constantly buying and selling.

5. Impatience

Many new investors will purchase a few stocks then check the price every day and after a month become impatient and sell. Impatience is one of the worst characteristics of investors since most stocks will have a slow and steady growth over many years.

6. Becoming Emotional

It is quite common for many investors to develop emotional attachments to investments they've purchased. For one reason or another, an investor will purchase a stock and refuse to sell it even if it is no longer performing. Many investors won't sell out of stubbornness, attachment or denial. Only make decisions about holding an investment if logic and analysis hold true and can justify continued ownership.

7. Overconfidence

Some investors will pick a couple of stocks which have 200% or 300% returns and then become overconfident that they are investment pros. Getting lucky isn't the same thing as being good so don't let a few isolated instances of good luck cloud your judgment.

8. Not Adjusting

One way to avoid emotional attachments, overconfidence and excessive greed is to adjust your investment portfolio annually. This not only has the benefit of realizing gains by selling investments which had good runs but it also minimizes losses by eliminating under performing financial assets.

9. Following Others

It is never a good idea to follow the herd when making investment decisions. If everyone is jumping on the investment bandwagon then there is bound to be speculation which leads to bubbles. If you already own an investment which is having a tremendous run, sell before everyone realizes it is overpriced and the bottom falls out.

10. Going It Alone

Purchasing investments like Certificates of Deposit and money market funds can be done by most individuals. Higher-end investments like stocks, bonds, options and futures should only be considered for advanced investors and even then it can be beneficial to work with an investment professional. There will always be someone who knows more than you so instead of risking your financial future meet with certified professionals if you have questions or need guidance.

11. Taking Too Much Risk

Placing your entire nest egg into a single stock or purchasing commodities futures and options is likely to be too risky for most investors. People do this but it isn't recommended and is incredibly risky should something go wrong. Investors have been known to lose everything by placing a bad bet on a sure thing only to have it not go as planned.

12. Not Taking Enough Risk

The flip side however is no better when it comes to risk. Individuals which have hundreds of thousands of dollars in a savings account or money market fund are actually losing money. The yield on these accounts are normally less than inflation and therefore lose value over time. Be sure to take some risk otherwise you may find yourself worse off in retirement by outliving your savings.

Image by: Chris Beckett