Plenty of mistakes have been made over the past 18 months. Make sure you don't fall for these 3 simple mistakes.
"Learn from the mistakes of others. You can't live long enough to make them all yourself." -- Eleanor Roosevelt.
Some mistakes are more painful than others. As we've seen clearly with the fall of the housing market, one financial mistake can ruin a whole lifetime of scrimping and saving.
But I'm not here to talk about the past … let's focus on the common mistakes you should avoid. We can debate about whether the three I've selected are truly the biggest investing mistakes you can make (I invite you to do so in the comments section below), but these are certainly three investing mistakes you don't want to make.
#1 Don't Let Poor Asset Allocation Make You Poor
Before trying to figure out if the latest share tip is worthy of your investment dollars, you need a plan. How much should you put into shares? How much into bonds? How much should just be in an emergency savings account fund?
Four rules of thumb are:
Rule 1: If you need the money in the next year, it should be in a high interest savings account.
Rule 2: If you need the money in the next one to five (or even seven) years, choose safe, income-producing investments such as gilts or bonds.
Rule 3: Any money you don't need for more than seven years is a candidate for the stock market.
Rule 4: Always own shares.
Remember to be honest with yourself about how risk-tolerant you are. When times are good, it's easy to take too many risks with your portfolio, and vice versa.
#2 Don't Invest In Anything You Don't Understand
Buying shares in a company you don't understand is a bad move. It leads to finding the next Cattles (LSE: CTT) instead of the next Tesco (LSE: TSCO). Do you know what’s lurking in the accounts of companies in the financial services industry? Even now, at vastly reduced valuations, jumping into companies like Royal Bank of Scotland (LSE: RBS) and Aviva (LSE: AV) without truly understanding their complexities and regulatory environments is fraught with danger.
If studying individual companies isn't your thing, there is no shame in buying and holding an index tracking fund. In fact, I believe that's the best strategy for most investors.
Also, don't trust an "expert" just because they use terminology you don't understand. A lot of financial advisor types hide behind nonsensical jargon to inundate, abuse, and enrich (themselves). Ignore them like you would an e-mail entreaty from a Nigerian prince.
If you have no clue what the risk is in the risk-reward balancing act, you're better off putting your money elsewhere. Yeah, it's possible to take an insane risk and make your fortune in a year. It's also possible to win the lottery … but I wouldn't bet my retirement on it.
#3 Never Buy On Margin
Just don't do it. Using margin (i.e., borrowing money from your broker to buy shares) is a very dangerous game. You are not in control of your own destiny – using margin transfers your financial destiny to the whims of the stock market and of your broker.
Don't Hate … Participate!
Here's a bonus tip: don't procrastinate. It's never too late to start taking control of your financial future … but it's never too early, either.
Start with a little Foolish education by checking out our Ten Steps to Financial Freedom.
Happy, mistake–free, investing.
More on the economy and the markets:
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> Bruce Jackson does not have a beneficial interest in any of the companies mentioned in this article.
