The 7 Mistakes Investors Make

Mistake #1: No Written Plan

I'm sure you've heard it before; people spend more time planning their vacations than their finances. It doesn't make much sense but it seems to be the norm.

A Fortune Magazine article stated that people with written plans for their investments average about 5 times as much money as those without a plan.

Of course the plan itself won't make you any money. But putting it in writing gives you focus and makes the investment decisions that much easier. Don't forget to review your plan regularly (at least once a year) to see if you're on track and if you need to make any adjustments. If you don't have a plan how can you know if you're heading in the right direction? The best plans are useless if they sit on a shelf collecting dust.

There are many ways to get started. If you are a do it yourselfer, there are plenty of websites with basic financial plans to get you started. If you have investments of any significance the holder of your money should do a plan for you (If they haven't already). If they can't or won't you should consider moving your money to one who can.

Mistake #2: Putting it Off

Waiting for the "right" time can lead to disaster. Procrastination comes in many forms. You don't start saving for retirement until it's nearly upon you. You should review your investments but there always seems to be more "important" things. What's more important than your finances? You think you can catch up later by contributing more or wait until the markets are "better".

Every day you avoid investing is a day you won't get back. The best time to invest always has and will always be today.

Mistake #3: Allowing Emotions to Drive Investment Decisions

Easily the two biggest forces driving the markets are fear and greed. Try to remember this the next time you listen to a radio or TV commentator explain what's happening in the markets. You'll hear either greed or fear over and over again.

Fear of rising interest rates. Fear of inflation. Fear of falling profits. Somebody's always afraid of something. This is why investors bail out when things look bleak and since everyone else is selling too; prices are down. This increases the loss in the value of the investments.

Greed on the other hand blinds investors. The thinking is it will continue forever. Don't forget the tech bubble of 2000. That was greed in its finest example. Many companies that hadn't shown a profit yet; were worth millions on paper. You can't ignore the fundamentals. Eventually it evens out.

Of course we all want to make money with our investments. But this can easily turn into greed when the desire for profit gets out of hand. At the same time we should respect bear markets but not enough to begin a panic that will exaggerate losses.

Mistake #4: Putting Too Much faith in Recent Performance

Whatever happened will continue to happen. That's true most of the time but the markets are unpredictable by nature and recent performance is a lousy indicator of future performance. The past does not equal the future.

Recent performance is a way of measuring an investments value but there really is no way to know. Longer term (at least 10 years) is better but is by no means infallible.

Investors tend to have an emotional attachment to a good performing investment. Often times to their detriment, by staying with it too long even when its run is over (Remember Nortel anyone?)

Mistake #5: Taking Too Much Risk

There is a very real possibility that you will lose money when you invest. Many investors take too much risk; they chase the latest fad or "hot" investment. The know that high risk can lead to high reward but think they are immune to losses or will somehow "know" when it's time to sell. Usually by that time it's too late.

Far too few investors actually understand the risks they are taking. Most don't understand what could go wrong and have a plan for what to do when it does.

This kind of risk taking is really nothing more than speculation, and is only ok if you are prepared and can afford to lose all you've invested.

Mistake#6: Not Taking Enough Risk

The flipside is those who perish the thought of losing any money at all ever. They want everything secure and guaranteed. Absolute security doesn't really exist.

Very low risk always means a low return. For example a GIC will guarantee you about 4 or 5% these days but if you factor in inflation it's only worth about half of that. If all your investments are with GICs you probably won't have enough money to retire with in the long run.

Of course risk is tempered by a long term approach. The markets have never lost money over a 10 year period or longer.

Mistake #7: Requiring Perfection to be Satisfied

There will always be an investment out there that's outperforming yours. Even if you happen to have the best performing fund this month, it's likely not to be in the same position the next month.

Perfectionists tend to chase the "best" investment using past performance as their guide. There's no way of knowing this will continue.

The way to increase the chances of a good performing portfolio is to stay the course. If you're always chasing for the "best" you'll never stay the course

How To Avoid These Mistakes

· Ensure you have a written plan that outlines what you must do to reach your goals. Use specific and measurable goals so you can easily keep track of your progress

· Educate yourself. Get research from reputable sources on investing. There are plenty of beginner investment books at your local bookstore or library. Remember to look for investment books of a general nature and not that of a specific investment or strategy

· If you don't understand an investment, don't invest in it. It will spare you a lot of stress

· Slow down. It takes time and patience to see a plan through and see real results

· When you notice emotions are driving your decisions, try to be disciplined. If you are having difficulty with that then consider seeking professional investment advice.

Jason Cohen is a financial planner and investment advisor working in the Greater Toronto Area. He has over 6 years experience in all realms of financial planning including investments, insurance and banking.

Jason specializes in alternative investment strategies and tax savings for his clients. He takes a different approach while helping his clients to reach their goals.

Jason can be reached at 416 556-7618 or email at jason@jcfp.ca. For more information go to his website http://www.jcfp.ca

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