5 Mistakes Investors Just Can't Afford

Would you like to have better returns on your investments? (Who wouldn't, huh?) Well, a key part to making sure your return is as high as possible is to make sure you avoid common investing mistakes. This article from Money Central lists the five top mistakes investors make that limit their returns. Their thoughts:

1. Investors are biased toward what they know. They over allocate to company stock and under allocate to international investments.

2. Emotion trumps rational judgment. People hate to lose more than they like to win.

3. Investors have big heads. The majority of people (though men are more guilty of this than women) think they are better than average at a variety of tasks, such as driving and investing. But by definition, a majority of people can't be above average. This unrealistic assessment of one's own investing prowess causes investors to overtrade and pay the resulting higher fees and taxes.

4. Myopia causes misallocation. Investors tend to view each investment and each account (401(k), IRA, college-savings account, etc.) in isolation rather than in aggregate.

5. More, more, more. We Americans spend what we earn. In fact, we spend more.

This is yet another reason I invest in index funds. Index funds keep your fees low (so your total return ends up much better than most actively managed funds). They also allow you to trade domestically and internationally. Plus, two big benefits for me are that they take little time to manage and are easy to handle. (I prefer investments that only take 15 minutes to manage.) All this and they come highly recommended by people who manage billions and investment pros alike. What's not to love?

I find it interesting that spending more than you earn is one of the top five investing mistakes, but it makes sense. Spending less than you earn is the pathway to becoming wealthy and is vital if you want to have any sort of investment portfolio at all. You can have the biggest salary in the world, but if you spend it all and then some, you're still going nowhere and your investments will suffer.

Finally, I can relate to the misallocation issue. I'm trying to get my allocation right this year. I've already made great progress, but still have a long way to go.

Comments

[Rebound Trading Systems]

The importance of diversification is what has caused me to focus the majority of my investing into Mutual Funds Trading. Since I began to focus on ttrading mutual funds rather than idividual stocks, my profits have improved significantly with a smoother equity curve.

Upgading No Load Mutual Funds and Exchange Traded Funds (ETFs) is a great way to diversify your investment portfolio.

[Susan]

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[Patrick Pappano]

As the writer points out, Index Funds offer good investment value. Plus, since index funds aren't identified by fanciful names, access to discrete sectors or national economies is much easier to negotiate. Index Funds are re-priced every 15 seconds or so and trade at Net Asset Value (NAV). Alternatively, closed-end funds trade at a discount or premium to NAV, offering the investor the added potential of moving from discount to premium, as well as identifying discrete sectors or national economies. Also, Indices are mostly capitalization-weighted, making Index Funds likely to be overbought. Power-Shares(tm) equal weight their indices and hence are likely to provide better performance.