What does that mean? If you have a non-diversified portfolio, then you’re putting all your eggs in one basket,” explains Lorrie Minor, a certified financial planner™ with LearnVest Planning Services. Simply put, if every stock you own is from one company, and that company stumbles, so does your portfolio. Or as Minor puts it: “If that one basket doesn’t do well, it’s going to tank your entire account.”
After studying the portfolios of identical and fraternal Swedish twins, they concluded that “a genetic factor explains about one third of the variance in stock market participation.”
What You Can Do About It:
Depending on your investing goals, you may want to choose a mix of stocks and bonds, consider investing in both U.S. and international opportunities and regularly rebalance your portfolio, to make sure that one area doesn’t have too much influence on your account’s overall performance. Still confused? Our Start Investing Bootcamp will give you an overview of how and why to begin building a portfolio.
3. The Money Mistake: Chasing Hot Stocks
What It Looks Like: The researchers found that genetics also factored into a tendency to invest in stocks based on how they’d done before, a known investment no-no called performance chasing. Here’s the problem: Just because a given mutual fund, or tech stock, has done well in the past doesn’t mean it will always continue to. In other words, in real life, past or recent performance is a good indicator that something will continue to be good, but, says Siegel, “in the stock market, that’s just not true.”
What You Can Do About It: Minor calls this “chasing hot money.” And the problem with it, she says, “is that you’re going after something that’s already gone up, and it’s not necessarily going to go up again.” Instead, she says, be levelheaded when you’re eyeing your next investment, and try not to let any get-rich-quick excitement get the best of your emotions—or your bottom line.
4. The Money Mistake: Trading Too Often
What It Looks Like: No one can predict the future, but investors are trying to do just that when they buy or sell too quickly (and frequently) because they’ve seen or read something that they think foretells a big win—or loss. “Studies show that it’s extremely difficult to anticipate all the factors that are going to move the market,” says Minor. And, Siegel adds: “Studies also show that people would actually have more money at the end of the year if they stayed away from changing their portfolio due to trading.”