Even if you've held a brokerage account for decades or have made it a point to stay up-to-date on your daily stock market news, one thing is clear: There's only one Warren Buffett—and you're not him.
And that's O.K. Very few people come close to reaching the level of investing wisdom held by the Oracle of Omaha. After all, even the professionals don't understand investing all the time, so why should you?
In fact, there are lessons we could all stand to learn about managing a portfolio—regardless of whether you're an old pro at it or a total newbie. Take these six common blunders that even experienced investors tend to make.
Rookie Mistake #1: Investing Without Purpose
Passionate investors are often glued to the financial news so they can glean more insight on what exactly to invest in. Maybe Company X has a game-changing product in development or Industry Y is showing strong market growth—and they want to get involved ASAP.
But it’s important to take a step back before taking the plunge. “A lot of people do good research on their own and identify solid funds,” says Chad Carlson, a CFP® with Balasa Dinverno Foltz. “But what’s the goal of their portfolio and how do those funds fit in? Does this make sense?”
In other words, consider asking yourself: Am I seeking growth? Do I want stability? Do I want dividends? What, eventually, do I want to tap this money for—retirement or some other savings goal?
Answering these questions will help you decide whether that “great” investment makes sense to add to your total mix. Remember: Your whole portfolio should reflect your risk tolerance, goals and timeline. So if any changes you make skew your portfolio too heavily in one direction, be prepared to reconsider whether to make the investment or be willing to rebalance accordingly.
Rookie Mistake #2: Not Being Fully Aware of Risk
Many investors say they have a low tolerance for risk, and that may be true in one part of their money life. But, in other ways, they may be inadvertently exposing themselves to more risk than they realize.
Take retirement accounts. Ted Toal, a CFP® with Rockwood Wealth Management, believes that many people tend to be too conservative with their 401(k) allocations, mostly because they'll pick from the options that are laid out for them, rather than basing their decision-making on how far away retirement is for them.
“Most clients are given a list of choices, and rather than even attempt to choose, they either default to one of the target funds or the fixed income [option],” Toal explains. Even with a target date fund, which rebalances a portfolio for you based on a set retirement date, you still need to pay attention to the investment mix because some funds with a soon-ish target date may be more heavily weighted in bonds than you may prefer.
Meanwhile, in another part of their portfolio, that same “conservative” 401(k) investor might, say, hold a large number of shares in a single stock simply because they believe in the company or have some other attachment to it.
“So although they might be willing to accept drastic price fluctuations there, they are unwilling to tolerate the same volatility elsewhere,” says David Shotwell, a CFP® with Rutter Baer. “At the same time, they are ignoring the risks that go with investing in a concentrated position that lacks diversification.”
Bottom line? Your risk should reflect the investing goal you're trying to achieve, the timeline by which you want to achieve it and your tolerance for fluctuations. It's O.K. to have different levels of risk for different goals like retirement or investing for a home down payment. But within that goal's portfolio, consider balancing your need for growth with your desire to not lose sleep at night over volatility in the markets.
Rookie Mistake #3: Making Emotional Decisions
Seasoned investors may think they're no longer affected by the ups and downs of the market, but in reality, few of us are totally immune. “What I see is that even if [investors] are experienced, their emotions can still get involved” in the decision-making process, says Brian Frederick, a CFP® with Stillwater Financial Partners.
That’s partially because of recency bias—a tendency to believe that investments will continue to perform the way they have in the recent past. “Sometimes it’s easy to get caught up and assume that what’s been happening for the last three months is going to happen indefinitely,” Frederick says, adding that this can make someone want to sell investments when the market dips.
So just remember that no one can time the market—not even the professionals—and since you’re likely investing for the long haul, it’s better to stay invested than to pull out in a panic.
In fact, research shows the U.S. stock market has never lost money over a 20-year period. By contrast, if you'd put money into the stock market in 2008, and then pulled out by year’s end because of the market crash, you'd have lost 37%—and missed out on the record rallies of 2013.
So if you have decades before you need to tap your investments, try to stay the course and stick to the overall plan you’ve set for yourself. “When things are going down, even though it makes you feel better to sell," Frederick says, "it’s not the right thing to do in the long run.”
Rookie Mistake #4: Acting on a "Hot Tip"
It often happens at parties: Your uncle’s cousin’s husband hit it big after investing in that next-big-thing IPO. Or a friend of a friend insists you must start hoarding gold.
It’s tempting to want to jump on an opportunity, but if your friends and family really had all the answers, they'd be on the cover of Fortune magazine. So keep in mind that your “investing expert” friends “will tell you about every good investment they’ve made, [but] they will never tell you about their bad investments,” Toal says. "This creates a false emotional aspect in your brain that they know what they’re doing.”
In other words, take that investing advice with a grain of salt. “I always tell clients, ‘Your plan isn't going to succeed based on whether you do or don’t buy this investment,” Toal says. “More often than not, the hot tips do not work out. It’s just not worth the risk.”
Rookie Mistake #5: Forgetting About Fees
No matter what your experience level, there’s one thing both beginner and seasoned investors can agree on: Fees can leave you dumbfounded.
One survey found that nine out of 10 Americans severely underestimate how much they pay in 401(k) fees, and with about 28 different ones to watch for—administrative fees, management fees, sales charges, to name a few—who can keep track?
And remember that every time you buy or sell an investment, you may be paying a price that eats into your returns: One study found that investors in mutual funds actually pay more in trading costs than they do in expense ratios (a fund’s operating fees).
Exchange-traded funds, in particular, make it easy for investors to trade effortlessly and frequently because they can be traded throughout the day like a stock. Unfortunately, the ability to make such reactive moves also makes it easy to rack up transaction fees in the process, warns Carlson.
RELATED: The ‘Other’ S&P 500
It may take a little detective work, but put in the effort to uncover what types of fees you are responsible for within your portfolio. You can do this by checking out your fund's prospectus and reading through the fine print. And if you're unsure about the costs you're paying, ask your brokerage firm for a full fee schedule.
Rookie Mistake #6: Ignoring Tax Implications
You may not be an accountant, but it might be worth consulting one when you’re dealing with taxes and investments.
In some instances, your investment accounts may offer some tax benefits. For instance, what you contribute to a 401(k) or IRA can lower your taxable income today, although you’ll be taxed on the withdrawals in retirement. Or if you anticipate you’ll be in a higher tax bracket when you’re older, a Roth IRA or Roth 401(k) might be better because you'll pay taxes on contributions now, but your earnings can be withdrawn tax-free in retirement.
However, with investments you hold in brokerage accounts, you’ve got capital gains taxes to think about. So although you may have made a decent return selling that stock, was it worth the capital gains tax you had to pay? Or did it, for the most part, nullify the benefits of selling? Plus, the capital gains taxes you pay will depend, in part, on whether you've held the stock for less than a year or longer than a year, so note that the timing of your sale makes a difference.
It’s not an easy maze to navigate, so make sure you’re up-to-date on your short- and long-term capital gains rates—which vary depending on your tax bracket—and how your current retirement mix may affect both your present and future tax returns.