19 August 2017

How to Avoid Biggest Investment Mistakes

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Everyone wants to know when the stock market is going to tank -- and how high it's going to go just before it does. It would make getting rich a lot easier. Even Wall Street experts don't know exactly what's ahead in the short run. But what they do know is how to position your investments to make the most money over time. Here are the top 4 mistakes investors are making at the moment -- and how to avoid them.

1. Not investing in stocks: You have to be in it to win it, as the old lottery adage goes. That's true of investing as well. Stocks offer the highest returns over many years. The problem is a lot of people are scared of stocks after the dot com bust and the financial crisis that led to the Great Recession. 

Too many investors are sitting on the sidelines and keeping their money in cash -- which earns them nothing. Meanwhile, the S&P 500 has gained about 180% since the stock market hit its low point in March 2009. When prices are falling, it's easy to get skittish and avoid putting money into the market. Still, the best time to build positions for the long haul is when there are more bargains.

2. Investing in riskier assets: The second pitfall is that investors are putting too much money in long-term bonds and high-yield -- often called "junk" -- bonds. It's been dubbed the "search for higher yield". "High yield" is Wall Street speak for "high risk." You get paid more because there's a greater chance that you won't get paid at all if a company or entity goes belly up.  

At the moment, the junk bond market is so hot that investors aren't even demanding much extra compensation for the risk they're taking on. That could come back to bite them. Chris Philips, a senior strategist at Vanguard, notes that money going into higher risk assets has been higher than what's being invested in lower risk securities over the past 12 months.

3. Short-term thinking: Another "no no" is that investors have short memories. They tend to look at what did well last year -- or even last week -- and put their money into that instead of thinking about the future. Consider that famed investor Warren Buffett isn't a day trader. He buys companies with the intention of holding them for awhile -- often years. Most investors are saving for retirement, buying a house or other long-term goals. They should have a similar mentality to Buffett. 

4. Forgetting inflation: The economy will eventually pick up more momentum and that will lead to higher inflation. The Federal Reserve will have to raise rates as a result. Rate hikes could come as soon as next year. Once the Fed starts raising rates to keep inflation in check, many of the bonds that did well last year won't look as good. Rising inflation will eat away at fixed-income returns. Over time, stocks are the best protection against inflation. 

Click here to access the full article on CNN Money.

 

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