Whether you’re a seasoned investor or new to the game, you’ll want to make a conscious effort to avoid these three common investment mistakes:
Relying on emotions. According to Essentia Analytics, behavioral scientists have studied biases that are shown to drive investment choices. For example, you might fall into anchoring bias. That’s the irrational decision to hold on to something — a stock, a car, a piece of information — just because you already own it. There’s also recency bias, which involves the tendency to lean more heavily on recent investment performance when considering future returns. This type of bias can unduly impact investment decisions as people approach retirement. One idea to skirt such emotional hazards may be to place investment contributions on autopilot and readjust portfolios annually to align with long-term goals.
Taking or avoiding risk. You might pack your investment portfolio with individual stocks that have performed well in recent years. Unfortunately, if stock in one of these companies takes a dive, your retirement account may never recover. On the other hand, if you’re too averse to risk, inflation may eat up the purchasing power of your money as it languishes in low-interest accounts. To avoid such pitfalls, many people consider investing in a few well-diversified low-cost mutual funds to allow money to grow without undue risk.
Not investing at all. If you live only for today and don’t save enough for retirement, you’ll likely struggle to meet expenses later. The good news is because of compounding returns, the earlier you start saving, the less you may need to save. And if your employer provides matching contributions to your retirement account, make sure to take full advantage.