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10 Investing Mistakes Most People Make

10 Investing Mistakes Most People Make

Whether you are investing to build a retirement fund, or to put your excess cash to work, you should always be wary of the following investment mistakes. These can ensnare an experienced investor as easily as they can entrap a rookie. Here are 10 investing mistakes to watch out for:

1. Investing while in debt.

The phrase “cheap debt” is thrown around by the financial experts routinely. However, it does not apply to credit cards. To invest money when one is living off credit cards is a big no-no. One should repay credit card debt as soon as possible.

Similarly, putting money aside for investment while having a student loan or a house mortgage might seem like a good idea, as the expected rate of return on the investment is higher than the expected cost of debt. However, the comparison is incorrect. Today’s cost of debt is being compared to tomorrow’s rate of return. We are coming out of the zero interest rate period, and it is not unreasonable to believe that debt will become expensive again over time. One should prioritize offloading all debt before one starts setting aside money for investments.

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2. Investing with a very high cost of transaction.

When one buys or sells investments, one invariably coughs up fees and charges. In some cases, the cost of a transaction is quite high. When investing in a house, for example, be sure that you do not liquefy the investment within five to seven years. If you sell the house within that time frame, then the transaction costs will substantially eat into your rate of return.

Another avenue in which the costs are very high is investment in physical gold. Apart from the transactional costs of gold, one should account for the charges applicable for its safe and secure storage. It is more advisable to invest in gold ETFs instead of physical gold.

3. Investing with a single-minded focus on fund fees.

The internet is full of advice on choosing low-cost funds instead of paying a premium on funds managed by rock-star fund managers. Undoubtedly, a lot of advice is sound, but some investors make decisions purely based on fund fees while being ignorant to other parameters like the rate of returns they deliver, or the amount of asset diversification they have. In some cases fund houses use “cheap funds” as a marketing ploy. In Britain, HSBC’s Equity Tracker Fund has an expense ratio of 0.27% a year, while Virgin’s equivalent equity fund charges a full percentage point extra. However, both the funds are being heralded as low-cost funds by their respective fund houses.

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4. Investing in hot tips.

Hot tips and fads rule the market, and just about everyone is an expert on the Next Big Thing. However, such advice should be taken with a grain of salt. Investment is a process, and due research is a necessary aspect of this process. After all, if you are not willing to put in the time and effort necessary when making an investment, you can’t expect your investment to reward you with your returns.

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    5. Investing decisions based on market conditions.

    Market conditions cannot dictate one’s investment strategy. The inherent volatility in the market is frustrating, especially when investment portfolios underperform the benchmark index. Doubts start creeping into one’s investment strategy. However, investment strategies cannot change with the market cycles. It is imperative to have faith in one’s strategy, provided it is based on sound characteristics. A good strategy with a long-term outlook may underperform for a period of several months based on the market conditions, but in the long run it will reap the desired rewards.

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    6. Investing while overpaying for investment services and financial planners.

    There are multiple avenues for investing one’s hard-earned money. To understand all the options out there you may need assistance, and that is where financial advisers come to our aid. However, when a financial adviser builds a portfolio of low-cost index ETFs, then one wonders if there is any value to the adviser. The cost advantage of investing in a cheap ETF is consumed by the fees of the adviser. Some advisers even receive hefty commissions for recommending investment products. If that is the case then the financial adviser’s motives will not match your interests. One should be wary of such advisers.

    7. Investing on margin.

    No matter how enticing an opportunity, one shouldn’t buy stocks or investments on margin. Margin trading has its benefits, but those should be left to the professionals. If the investment is leveraged, then one bad trade can wipe out a significant chunk of one’s investments and set one back significantly. In addition, when investing in property that is not for personal use but for investment, using housing loans is not a good strategy. The recent housing crisis points to the flaws of such leveraged investing. Bottom line: always invest with money that you have and can afford to lose without any adverse impact to your financial health.

    8. Investing with an unrealistic expectation of return.

    Investing with an unrealistic expectation of return, and without accounting for the compounding magic of time, is a strategy that is doomed to fail. In pursuit of manifold returns, people dabble in the penny stock market and end up burning their hard-earned money. In the end, if an investment idea sounds too good to be true, then it probably is.

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    9. Investing out of fear and greed.

    Emotions are attached to one’s investment decisions. We all feel joy when an idea works out to our benefit, and all feel despair when a decision goes bad. However, the emotions of greed and fear should not override one’s sense of logic and reason. Greed and failure prevent one from making smart decisions; they make one follow the herd mentality instead.

    10. Investing without a plan.

    Investing is a boring process. To see meaningful returns, one needs time to do its magic. Patience is key. An investment plan, revolving around meaningful financial goals, helps when things get rough. It provides motivation to save money when the same money could easily be spent on mundane activities. It provides the focus and determination required to pursue a life of financial independence.

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    Last Updated on June 6, 2019

    The Average Retirement Savings and How to Save Wisely

    The Average Retirement Savings and How to Save Wisely

    Are you on track for retirement?

    If not, don’t worry, I’m not sure either. I save each month and hope for the best.

    Fortunately, I’m at an age where most people don’t save so I’m ahead of the curve.

    But, what if you aren’t in your 20s? What if you’re near retirement and are looking to gauge where you stand?

    If so, keep reading. Here’s how to prepare for retirement and save wisely during the process.

    What Does the Average American Have Saved for Retirement?

    Saving for retirement is tricky.

    Tell someone straight out of college to save $10k a year for retirement and it’ll be next to impossible.

    Make the same request to someone decades older and they’d be more likely to be able to save this amount. But, a 20-year old college student can be “financially ahead” of someone saving more than them. Why?

    Age matters in your financial journey. The younger you are, the more time you have to save and put compound interest to work. As you get older and have more saving power, you’d have less time to put compound interest to work.

    Here are the average savings Americans hold by age bracket:

    20’s – $16,000

    During this stage, most people are paying loans and moving up the corporate ladder. Your best bet during this stage is to focus on eliminating debt and increasing your income. Don’t focus only on getting a high-paying job neither.

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    Instead, focus on learning via Podcasts, reading books, and taking specialized courses. Doing this will make you more valuable and give you more career options.

    30’s – $45,000

    At this stage, you’ve hopefully escaped your entry-level salary and work at a career you enjoy. Your earning power has increased but you now have more obligations. For example, marriage, kids, and a mortgage.

    Set a plan to pay off all your debt and focus on eliminating unnecessary expenses. Leverage financial tools like Personal Capital to ensure you’re on track for retirement.

    40’s – $63,000

    This is the stage where you’re at the prime of your career. Top financial institutions recommend you have at least 2 to 4 times your salary saved up. If you’re falling behind, start maxing out your 401K and Roth IRA accounts.

    50’s – $115,000

    During your fifties, you’re close to retirement but still, have time to save. You may be helping your kids pay college tuition and other expenses. Since you’re at the peak of your earning power, max out all your retirement accounts.

    60’s – $172,000

    By this point, you should have about eight times your salary saved up. If not, you’ll depend primarily on social security benefits averaging $1400 per month. Max out all your retirement options as much as possible before retiring.

    Ways to Save Money on a Tight Budget

    The sad reality is that most Americans aren’t saving enough for retirement.

    Even high-earning power isn’t enough to secure one’s financial future. You need to have the discipline to save for retirement while time is in your favor. Don’t wait for you to have a high salary to save, start with having a small budget.

    First, get a clear picture of where you stand. Write down a list of “needs” and “wants.” For example, Netflix and Amazon Prime are “wants” and a “cell-phone” is a need.

    Use tools like Personal Capital to analyze your spending patterns. Personal Capital allows you to add all your financial data in one place–making it a powerful option to gauge where you stand.

    Once you know all your expenses, organize them from highest to lowest expense. When you can’t cut more expenses, call your service providers to negotiate a lower price. If you’re not good at negotiating, use services like Trimm to lower your monthly expenses.

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    How to Save Money Each Month

    By this point, you know the average amount of money you should have saved for retirement based on your age.

    But, breaking this down into monthly goals can be challenging. Here are some rule of thumbs to follow:

    Aim to contribute 10%–15% of your salary each paycheck. Review your progress each week.

    Why so often? The reality is that life gets in our way and you will have many financial setbacks. Your goal isn’t to be perfect but to get back on track instead.

    Reviewing your finances weekly lets you know where you stand with your retirement. This doesn’t have to be a long process either. All it takes is login in Personal Capital to view your net worth and check how much you have saved for retirement.

    Turn saving into a game and aim to save more each month. It will get challenging but you’ll get creative and find more ways to save.

    Top Money Saving Challenge Tips

    To prepare for your financial future and not be another statistic you need to be different.

    How?

    By adopting new habits that’ll help you become a saving machine. Here are some ways you can save more:

    Automatically Contribute Towards Retirement

    If you’re working for a company, you can automatically contribute towards your 401k. If you’re not currently contributing more than 10%, make this your goal. Contribute 1% more today and automatically increase this amount a year from now.

    Odds are that you’re not going to be negatively affected by contributing 1% more. Many times we spend our money on things we don’t need. Contributing more towards retirement is a great way to secure your financial future.

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    Use the Right Tools to Know Where You Stand

    Once you’re contributing more towards your retirement accounts, gauge your progress. Make use of finance tracking apps to help you view the big picture of your retirement.

    When I’d first signed up for the app Personal Capital, I didn’t know I had a negative net worth. Despite saving thousands of dollars, my debt brought my net worth to the negative. Knowing this motivated me to save more and spend less.

    Now, I have a positive net worth. But, it was because I was able to view the big picture using the app. Find out what your net worth is using a finance tracking app and you may surprise yourself.

    Bring in Experts to View Your Blind Spots

    If you have too little or too much money saved, you should consider hiring financial experts.

    Why?

    You may need someone to hold you accountable to help you reach your financial goals. Or, you may need help managing your money as effective as possible.

    Regardless of the reason, getting help may help improve your financial situation.

    Before you hire an expert, find out which areas you need help the most. For example, if you’re constantly overspending, find a debt counselor. If you’re struggling with choosing the best investment options, hire a financial advisor.

    Speed up Your Retirement Contribution

    After learning how to manage your money well, the next best thing is to earn a higher income.

    You’re capped at how much you can save but not much you can earn. Even if your employer isn’t giving you a promotion, you can still take charge of your financial future. How?

    By starting a side-business.

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    This will be something you’d work on after you’ve finished your day job. Once you start earning income from your side-business, you’ll be financially better off.

    The best part is the more work you put into your side-business,[1] the more potential it has to earn more money.

    So start a side-business in an area you’re familiar with. For example, if you enjoy writing, do freelance writing for small e-commerce businesses.

    Once you’re earning a higher income, you can contribute more towards your retirement. Don’t wait for the right opportunity to secure your financial future, create one.

    Reach Financial Freedom with Confidence

    What if you were able to retire tomorrow with no problem, all because you’d have enough money saved up and little to no debt left to pay off? How would you feel?

    My guess is that you’d feel happy and relieved.

    Most Americans are falling behind their retirement goals for many reasons. They’re not prepared, they carry bad money-habits and are thinking short-term.

    For you to retire successfully, you need to work backward and adopt better habits. Contribute more towards your 401K and focus on growing your income.

    If you do, you’ll save money and pay debt faster.

    Don’t beat yourself up if you’re behind your retirement goals. Take the first step today towards a brighter financial future. Isn’t retirement worth the hard work and sacrifice to be at peace?

    Featured photo credit: Huy Phan via unsplash.com

    Reference

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