It's easy to have confidence in investments made during bull markets. Share prices climb, and any losses from poor decisions are usually recovered fast. But times of increasing market volatility tend to magnify mistakes, and many investors may lose confidence in their decision making.
Here are five common - but generally avoidable - mistakes.
No. 1: Timing the market
During a market downturn, investors who regularly contributed to their portfolios when the market was rising often decide to stop investing until conditions improve.
Not only is it impossible to time the ups and downs of the market with consistent success, but by sitting on the sidelines during a down market, investors could miss out on an opportunity to buy stocks and other investments at lower prices. In good times and bad, long-term investors should carefully consider the merits of dollar-cost averaging.
By continuing to make investments of the same dollar value at regular intervals, investors can buy more shares when prices are low and fewer when prices are high.
A periodic investment plan such as dollar-cost averaging does not assure a profit or protect against a loss in declining markets. Also, since such a strategy involves continuous investment, investors should consider their ability to continue purchases through periods of low prices.
It also is important to continue making contributions to a 401(k) plan or a similar employee-sponsored retirement plan. These contributions often earn matching employer funding, which provides additional earnings potential.
No. 2: Skipping the research
Determining whether an investment is appropriate for an individual portfolio requires research. There are more companies and investment products to invest in today than ever before, and investors need to gather information to determine which investments have growth potential.
Before making an investment decision, it's helpful to evaluate options in the context of comparable opportunities. At a minimum, investors should find two articles by different authors about the company or investment product and review the company's Web site. The investor relations and news sections of most Web sites have useful information. Financial statements also should be reviewed, and anything that looks vague or unusual should be carefully investigated.
No. 3: Chasing past performance
Yesterday's hot stock may have topped out, and today's innovative startup may not have the wherewithal to stay in business, so it's important to make investment decisions with the future in mind. If there is strong growth potential, and the fundamental likelihood of the company's success looks good, then it may make sense to invest even after a successful run. However, past performance is no guarantee of future results.
No. 4: Trading too often
Frequent trading reduces the total return of a portfolio. In addition to the trading fees and taxes incurred, frequent trading does not reflect a long-term outlook and thoughtful investment strategies, as neither timing the market nor running from losses enhances your portfolio's performance.
No. 5: Selling low - or not at all
Before selling a stock or investment product that has tumbled, it's important to do additional research in order to understand why it fell. This will help investors anticipate the investment vehicle's potential for recovery. If the setback appears to result from a temporary problem that can be easily overcome, investors may even want to buy more while the price is low.
It's also important to know when to take a loss. It hurts to lose money, but a little pain now may pay off in the long run.[[In-content Ad]]Timothy M. Reese is managing director-investments for Wells Fargo Advisors in Springfield.
