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II.3: Top 10 investment mistakes (Paul Hollosy)

Top 10 Investment Mistakes

Before investing, it is imperative that you have money to set aside for such purposes. This means income beyond that needed for your living expenses. Once you have an amount that you can invest, it is up to you to focus on your investment objectives. Common reasons why people begin their investment portfolios are retirement, college tuition for your children, and buying a home. To invest wisely, you need a plan that lays out why you’re saving and when to plan to spend it. Below are some common investing mistakes.

1. Lack of diversification. As a rule of thumb, if you put all of your eggs in one basket you are taking a much greater risk than if you diversify. Spread your investment money around.

2. Looking for instant results. Most investments take time to grow, particularly if you are invested in the stock market. Too many investors make the mistake of getting easily frustrated and selling quickly. While there are successful day traders, it is not recommended for most people and not the way to build an investment portfolio.

3. Chasing results. Yesterdays hottest stocks or funds are not necessarily today's. Research investment vehicles and look for those that you anticipate will do well based on past results and indicators of future performance.

4. Not thinking of allocation first. Buying a stock, bond, fund or other investment before determining your asset allocation is a very common mistake. The first step toward successful investing should be determining how much you plan to invest in each asset class (bonds, stocks and cash) to meet your goals.

5. Not assessing your level of risk. Essentially, you have to consider how much money you can comfortably afford to lose without losing too much sleep. Investors frequently make the mistake of jumping into high risk investments for which they were not prepared.

6. Not paying attention to taxes. No matter what type of investment instrument you are considering, it is important to know that different investments are taxed differently. Do your own research, work with your investment advisor and involve a qualified professional to speak about Canadian taxation.

7. Deviating from your investment objective. One of the biggest mistakes investors make is not sticking to their original investment strategy. Do not let yourself get diverted by a hot tip, a sudden trend or a sudden down market.

8. Not understanding a particular investment. We have all heard stories of individuals who have been talked into investing in futures or other investment vehicles that they did not fully understand. Make sure you have an understanding of the type of investment and you are comfortable with the risks involved before proceeding.

9. Having unrealistic expectations. To keep your expectations realistic, assume that a diversified portfolio of stocks, bonds and cash should return roughly 8 percent a year over time, and you probably won’t be disappointed.

10. Not following your investments. Many people pay attention to their investments for a while and then make the mistake of getting sidetracked or losing interest. You should keep track of your investments on a regular basis.

Pavol Hollosy, Investment Advisor

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