We all make mistakes when it comes to finances and investments, so don’t waste time beating yourself up. You’re better off consoling yourself with the mantra, “It’s not about perfection, but correction.”
When it comes to starting a stock portfolio, it’s oh-so-important to remember that the very beginning represents a foundation. And you don’t want to build on sandy ground. You don’t want cracks in it. And you don’t want your amateur, know-it-all Uncle Ralphie foisting his lame advice on you.
Misconceptions abound as to starting an investment portfolio, and the research backs this up. A shocking nine in 10 investors have poor diversification, while six in 10 investors pay too much in fees, according to a 2015 analysis of 250,000 investors compiled by SigFig, the world’s largest online portfolio optimization platform.
If you’re just getting started, you can load up on wisdom — and know which investment mistakes to avoid — before taking the first step, even as you learn about the most common investing mistakes. Read through the top 10 investing mistakes to avoid when creating your stock portfolio.
1. Failing to Ask the Right Questions
Too many people blindly hand their money over to financial firms and money managers hoping for the best, said Bobby Monks co-author of “Uninvested: How Wall Street Hijacks Your Money and How to Fight Back.” These investors “dramatically increase their risk of ending up with lousy investments and overpaying for them,” according to Monks. “And it’s not enough to simply ask questions: You need to understand the answers — for example, how they’re compensated and whether they put a meaningful amount of their own money in the investments they sell you.”
2. Not Keeping Your Emotions in Check
Nothing hurts an investor with a new portfolio quite like irrational feelings that override rational choices, said Scott Puritz, managing director of Rebalance IRA, a retirement investment advisory based in Palo Alto, Calif. “Don’t let your emotions allow you to fall prey to gimmicks and trying to beat the market,” he said. “Instead, opt for a simple, straightforward investing strategy.”
3. Putting Your Portfolio on Autopilot
Whether they’re winning or losing, many new investors are reluctant to sell a stock when the time comes, said Cary Guffey, a financial advisor with PNC Wealth Management in Alabama. “The thinking goes that if something has made money in the past, it will continue in the future. The other side of the coin is when something is down, an investor starts telling themselves they will sell it when it gets back to a certain value.”
Related: How to Start Investing in Your 30s
4. Working With the Wrong Advisor
Picking an advisor is a decision that should always be made carefully, said Peter Mallouk, rated America’s No. 1 independent financial advisor by Barron’s in 2014. “Understand the importance of competence and, most importantly, make sure your advisor has no conflict of interest and follows the philosophy that makes the most sense for you.” Much of that, he noted, depends on whether you’re conservative or aggressive — which brings us to …
5. Not Knowing Your Risk Threshold
Taking a passive approach to risk is never a good idea. “Every investor needs to take some amount of risk, but the maximum acceptable amount is different for each,” said Christopher Geczy, director of the Jacobs Levy Equity Management Center for Quantitative Financial Research at the University of Pennsylvania’s Wharton School. “Here’s a handy rule of thumb: If you can’t sleep at night worrying about your investments, you’re probably taking too much risk.”
6. Lacking a Clearly Defined Plan
What purpose will your portfolio serve in terms of your larger financial goals? The answer to this question isn’t something to figure out later, but to know at the outset, Mallouk argued: “Whether it’s for retirement, education, excess wealth or any other portfolio purpose, first determine a specific goal. Everything else flows from that purpose.”
7. Trying to Time the Market
Some investors lose money right off the bat by trying to make a quick score through market timing — the theory that you can profitably buy and sell by predicting future stock movements. “Unexpected events having either a positive or negative impact on a company, industry or sector are virtually impossible to anticipate,” said David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business
8. Jumping in Without Knowing an Advisor’s Fee Structure
Ben Schwartz, a senior financial planning associate with Plancorp in St. Louis, agreed with the fee findings of the SigFig research. “Investors should avoid hiring an advisor without first knowing exactly what his fee structure is — as well as the fees associated with the advisor’s investment selections,” he said.
“Fees can significantly erode your portfolio’s return, so it’s important to know what you’re paying and why you’re paying it,” he added. Investors should look for an advisor with a very simple and transparent fee structure: “Make sure you know the services your advisor is providing in exchange for their payment,” he said.
9. Misunderstanding Performance and Financial Information
If a company’s track record sounds too good to be true, it probably is. “A large part of financial information that investors encounter is damaging or disingenuous,” Mallouk said. “For investors to protect themselves from taking action based on it, they must fully understand how reference sets work, [grasp] how performance data can be misleading, view financial news with skepticism and develop a skill for filtering out the noise.”
10. Going It Alone
Some things just aren’t wise to attempt for the first time all by yourself: building a house, taking apart a car engine, running the world’s largest democracy or constructing a portfolio with just the right balance of complex investments. It’s conventional wisdom that portfolio building, just like life itself, is all about relationships. Before you invest that first dollar, seek out people you can trust. Talk to friends and family members who have invested successfully.
And once you’re off and running in starting a stock portfolio, stay connected with professionals who know more than you do about the art and craft of portfolio creation and rebalancing. That way, you can get just the right guidance when things get rough, the best advice when it’s time to change direction and a rational opinion when conditions favor a calculated risk.