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Everyone knows the secret to investment success is to buy low and sell high. The problem is most of us lack clairvoyance.
We asked experts to weigh in on some of the most common mistakes investors make, and while it's easy to see that chasing hot stocks -- the most frequently cited mistake -- would be an exercise in futility, they reported other less obvious pitfalls to watch out for.
There are never any guarantees when investing, but avoiding these 10 missteps will better your chances of success.
1. Mismatching investment with goal
Need that money in the next couple of years? Don't put it in a hot emerging-markets fund.Consider when you'll need access to your money. This will help you avoid unnecessary transaction fees, penalties and risk.
"If you pick the right investment vehicle for the right timeline, you've got it 90% in the bag," says Richard Salmen, a certified financial planner and board member of the Financial Planning Association. "If your goal is only six months to two years off, you don't want to put your money in an investment vehicle that could fluctuate enough that you might miss it."
For some goals, such as paying for college, it may make sense to use a mix of investments, says Gail MarksJarvis, the author of "Saving for Retirement (Without Living Like a Pauper or Winning the Lottery)."
"If you are saving for college and your child is within three years of going to college, you've still got seven years until that last year of college," she says.
So while the bulk of short-term college savings should probably be very safe in certificates of deposit or short-term bonds or a high-yield savings account, maybe some of that money could be invested in stocks. "Just remember the rule of thumb," MarksJarvis says, "that money you'll need within five years shouldn't be in stocks."
2. Discounting fees
Fees may sound minuscule at 1% or 2%, but they can gouge your returns by thousands of dollars. (Read "Is your money manager overcharging?")"It's hard to beat the stock market," says MarksJarvis. "There's one thing you can control, and that's what you pay to be a part of the stock market -- and that's where the expenses come in."
Though all mutual funds have expense ratios, which cover investment advice, administrative services and other operating costs, some are much higher than others.
More from MSN Money and Bankrate.com
"Let's take a $10,000 investment that earns an annual return of 8% before expenses for 20 years," says Greg McBride, a senior financial analyst for Bankrate. "If the money is invested in a fund with an expense ratio of 1.25% instead of an index fund at 0.25%, the investor would incur an additional $4,128 in costs over that 20-year period. But the ending account value of the higher expense fund would be $8,000 less than if invested in the lower expense fund because of the loss of compounding on the money paid out in expenses each year."
To complicate matters, some funds impose sales charges, or loads. Load funds are available only through an investment adviser or broker who is compensated by sales commissions.
Picking no-load funds is one way to save money on fees. Instead of going through a broker, call a mutual-fund company directly to purchase a fund.
- Video: The ABCs of mutual funds
"If you were paying your broker 5.75% for a load, you would say to yourself, 'Well, that's the cost to play, I might as well pay it,'" MarksJarvis says. "But if you were putting $10,000 into the fund, that would mean you were giving your broker $575 to pick that fund for you and that you were putting $9,425 to work."
Though it might be worth paying a load if you don't have the time or inclination to make your own investment choices, just remember, it's hard, even for a skilled money manager, to make up for those extra fees.
"The fees will be higher for those funds," says John Pallaria, an adjunct professor in the certified-financial-planner program at Boston University, "but in return they're getting competent advice which will, in theory, give better results to offset the cost."
3. Letting investments languish
If you've arranged to have money siphoned out of your paycheck directly into a savings account -- pat yourself on the back for taking that step. But don't stop there.Saving money is a great start, but if you're not investing it wisely, you'll miss out on long-term gains, says MarksJarvis.
She illustrates this point with the example of a 35-year-old who, by holding $30,000 in a savings account until she retires, will have $46,000 after earning interest and paying taxes (assuming a 2% average annual return and a 25% federal tax bracket).
"On the other hand," MarksJarvis says, "if you put that same $30,000 into a 401(k) or an IRA, you wouldn't be paying taxes on the money as it builds up year after year. By investing in a simple stock-market (index) fund, that very same $30,000 would likely, if it followed history, turn into about $540,000 (assuming retirement at age 65 and an average annual return of 10%)."
Continued: Those dreaded taxes
TAGS: INVESTING - MUTUAL FUNDS - TAX PLANNING - RETIREMENT PLANNING
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