As a financial advisor, you must think I sound like a broken record. However, I earn my keep by keeping clients from making some very big mistakes with their money.
Now, as we experience a market correction and spate of scary headlines, I think it’s time to go over what the biggest mistakes are:
1. Speculating when you think you are investing
This happens during good markets and bad ones. Invest during dips if you have the money, but never if you don’t. (See Mistake #2.) Never invest because you heard a hot tip. Hot things burn. We never speculate. We follow rules to know when to buy, sell, or hold.
2. Borrowing to invest
No, you should never take a home equity loan to invest when the market goes down. (Or up, for that matter.)
3. Investing dollars you will spend in less than five years
These dollars should go into your emergency opportunity fund. Therefore, we have income in a preservation portfolio, and we replenish often.
4. Investing for an interest rate instead of total return
Interest will never be high enough to beat the cost of living. Owning at least a portion of your overall portfolio is an investment that gives you both growth and dividends that will keep you ahead of inflation.
5. Letting taxes be the tail that wags the dog
You may or may not pay a capital gains tax, but that doesn’t mean taxes should rule the decision-making process. It is an important piece we don’t overlook, but it is just a piece. We will help you look at all the reasons to sell an investment or not.
6. Waiting to sell something bad until the price gets back to what you paid for it.
You may recoup your losses sooner by moving to something better.
This can be having five different mutual funds in five different places, but they all own the same stock. Often, I suggest rolling over retirement plans when you retire to control your diversification. If you own, for example, the “ABC Growth Fund” and “XYZ Growth Fund” and they both own large portions of Apple stock, for example, you have less diversification than you think.
8. Feelings of euphoria…or panic!
Emotions are natural. We get excited when things are going well. We get fearful when they are going poorly. But, emotions have no place in making investment decisions. Your investment decisions are directed by your plan and only your plan.
Maybe I should have started with that last sentence as the headline! Plans, your plans, dictate every recommendation my team and I make. And it’s often why the second most worthwhile phrase we say is, “Have your plans changed?”
So, as we go through the ups and downs of the current market volatility, always remember to follow the plan. Remember, too, that if you decide to do something else, well…
You must not do that!
Always remember that we are here to help.