Personal Finance

Common Investor Mistakes

  • Believing one guarantee covers everything. When you hear, “Your investment is guaranteed,” you’ve got to ask yourself, “What is guaranteed? Is the return guaranteed? Is my principal guaranteed?” Don’t take the word “guaranteed” at face value. Make sure you understand what’s guaranteed, then question who’s guaranteeing it. You don’t want your guarantee in the hands of Conned You Company.
  • Making a purchase or sale based on a previous price. “Picture framing” is an interesting and potentially dangerous behavior. It works like this: You believe an investment has a certain value. You’re so proud of that beautiful value that you take a mental picture of it, frame it, and hang it on your mind’s wall. Every day you look at that picture. You love it. Then one day the market goes down, and now your actual value is less than your picture. But you decide not to sell your investment until it matches that beautiful number that’s in your framed picture. You have to look at the investment and its future. Its past worth is not important. The picture you framed is irreverent. You have to look at the probable future of that investment, and sell if need be.
  • Owning too much of the same thing. Some people think they’re diversified, but in reality they are not. Make sure you have different things in your portfolio, so that some zig when others zag.
  • Not having an exit strategy. A rising market raises all ships, but it will go down eventually. If you don’t have an exit strategy, the market could take away all your gains when it falls. If you want financial peace of mind, you have to know in your heart that you have a strategy that can protect you from bear markets.