New York - With today's markets as volatile as ever, investors should ensure that their portfolios are designed to avoid the following common mistakes:
- Not enough emergency or contingency funds - Prior to investing, make sure you have enough liquid funds to meet emergencies or other quick cash needs. The general rule of thumb that you should keep four to six months worth of living expenses in readily available cash may not be sufficient if your job may be at risk or you or a family member has poor health. Each individual should consider their own particular circumstance.
- Not having adequate insurance before investing - Prior to investing, you should ensure that you have adequate life insurance and disability insurance should something unfortunate happen.
- Poor Use of Tax-Deferred Accounts - Investors need to ensure they maximize use of their tax-deferred accounts such as Individual Retirement Accounts or Keoghs. Do not place tax-favored investments such as municipal bonds in an IRA. Rather, you should consider placing dividend paying stocks in tax-deferred accounts.
- Listening to friends who know nothing - We come across too many instances where investors take the advice of a friend because they always seem to know what is going on. Ask to see your friend's investment statements before investing or just nod your head yes the next time your friend suggests something. Then call us.
- Purchasing investments just because they are "high-yield" - Do not invest in dividend paying stocks simply because the dividend yield is high. High dividend yields or bond yields generally indicate riskier investments that may not be appropriate for your specific risk profile. In addition, the dividend or income that is producing the yield may not paid in the future.
- Not selling poor investments - Do not hold on to an investment under the belief that it will "come back." By not selling poor investments and re-investing the proceeds, you forgo the higher rates of return that the market may be rewarding other investors.
- Not selling profitable investments - Investors generally find it difficult to sell. Do not get caught with an aggressive and profitable investment when the market or stock turns ugly. You will find that 9 out of 10 times you will lose much of your profit.
- Owning too many mutual funds - Be careful not to own too many mutual funds. Generally, if you own more than 10 different mutual funds, you have created an overlaps whereby your mutual funds probably own the same stocks; hence, your portfolio is more concentrated than you think.
- No regular investment schedule - Although it may seem admirable to invest a lump sum of money in the stock market, it is better to invest set dollar amounts over periods of time to avoid timing the market.
- Investing large amounts in mutual funds in December - Many mutual funds distribute year- to-date capital gains to investors in the month of December. Hence, if you invest money in a mutual fund during this month, you realize immediate taxable income without increasing the value of your shares.
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