Of course, everyone makes mistakes, but some are worse than others. For instance, the types of errors you might commit when investing in equities could haunt you for years, dramatically affecting your lifestyle. Here are a few tips for avoiding several common mishaps.
- Show some patience. You cannot expect “instant gratification” whenever you invest. Adopt a view of the long term, and try to stay consistent with your overall plan despite any ups and downs in the short term. Recognize that you may have to hold assets for a period of time for the best results.
- Face up to reality. Don’t ignore what the numbers are telling you. For instance, if you have a favorite stock that is consistently underperforming, do not continue to “throw good money after bad.” Take your lumps and move on. Similarly, do not allow emotion to rule the stocks you decide to keep for the future.
- Remain diversified. On the other hand, no matter what the numbers say, you should not sink all your dollars into a single investment. Although diversification offers no guarantee of success in a declining market, it remains a viable way of reducing overall investment risk. Build a balanced portfolio with the assistance of your investment advisers.
- Do not overemphasize past performance. Are you familiar with the boilerplate language found in most investment-related documents? It states, “Past performance is no guarantee of future results” (or something to that effect). You probably do not pay much attention to it, but it is true. Instead of relying strictly on past performance, evaluate current and future prospects.
- Stay away from “market timing.” Typically, market timing is based on acquiring stock when you think it will go up and selling stock when it you think it will go down. It may work sometimes, but it can also backfire if your expectations are not met. It makes more sense to build a balanced portfolio based on your particular needs and tolerance for risk.
- Factor in taxes. Remember that it is how much you keep, not how much you earn, that really matters. Depending on the type of investment, and the timing of gains and losses, taxes may dilute a significant portion of your earnings. This is especially true now that tax rates have been raised for upper-income investors in 2013 (see sidebar).
Instead of investing randomly, develop an overall plan. If you can stick to it, you may be able to reduce or eliminate mistakes that have plagued you in the past.
Three Tax Changes for Investors in 2013
- The top tax rate on ordinary income (including short-term capital gains) increases from 35% to 39.6% for single filers with taxable income above $400,000 and joint filers above $450,000.
- The maximum tax rate on long-term capital gains increases from 15% to 20% for investors in the top income tax bracket.
- A 3.8% surtax applies to the lesser of “net investment income” (NII) or the amount by which your modified adjusted gross income (MAGI) exceeds $200,000 for single filers and $250,000 for joint filers.