5 Mistakes That Prevent Investors From Getting Rich

Human behavior is by far the dominant element in investing. Often times it's about avoiding unforced errors and not making that big mistake that completely erodes your financial picture.

Here are five common mistakes we see that can prevent investors from accumulating wealth:

1. Being Inconsistent – The get rich quick game is very hard in the stock market. Can it be done? Absolutely. But you want to make sure you are truly investing and not just trading. A mistake we see time and time again is inconsistent investors. Maybe they invested in the stock market when things were going well and then ran for the hills when the tide turned. The ones that are able to consistently put money away and invest in the stock market are the ones who triumph, no matter how the market is performing. Let’s be honest, most of us don’t have the time, energy, or passion to be consistently looking or thinking about our finances. You have to make investing convenient for yourself. Automate your investment decisions if you can. That’s why dollar-cost averaging can be a great technique for many investors.

2. Market Timing – Investors often become focused too much on short-term pricing. Become skeptical about these self-proclaimed experts and market forecasters. You will hear investment professionals try to predict where the markets are going. No matter their credentials, the answer is WHO KNOWS. Rarely do you get clear skies when investing. There are always threats to look out for and the financial media does a really good job making sure you know about them. But don’t get caught up in asking, “is this a good time to invest?” The answer is simply - the best time to invest is whenever you have the cash available.

3. Asset Allocation & Location – Where you put your money can be equally as important as how you are invested. You should be strategic with not only what investments you own, but also where you own them. We should be asking ourselves, “What am I building?”

Having different buckets in tax deferred accounts (IRA’s, 401k’s, etc.), tax free accounts (i.e. Roth IRA’s), and taxable accounts (i.e. investment accounts) can give you the flexibility you need in retirement. In your taxable investment account, why not own municipal bond funds rather than a standard bond fund so you can get a tax break? Did you know you may be exposed to capital gains by owning mutual funds inside your taxable accounts, even if you personally did not sell? With investments, especially in real estate, run different scenarios to see how you would hold up. We should always hope for the best but prepare for the worst. The winters will always come.

4. Imposter Syndrome – We’ve all done it, “Warren Buffett put some money in this company, it must be a good investment”. It’s never good when you are marching to the beat of somebody else. You never know the whole picture. Buying something when you have absolutely no idea what it is can be a disaster. If you can’t explain the company or what the fund is invested in to someone, you have no business owning it.

Another mistake we see is investors will look at the prior 1-year returns of funds offered to them, typically in 401k/403b accounts. They will identify the fund with the highest historical return and put their money into that fund. While this may seem logical, don’t chase the hot sector, the hot stock, the hot manager. Is it safe to be staring in your rearview mirror while driving on the highway? No, it’s ok to look back occasionally but we want to know what's in front of us.

Many believe that it’s going to be the right stock, ETF, or mutual fund that is the key to their investment success. But, it’s your behaviors and habits that will ultimately dictate your wealth.

5. Paying Yourself Last - You’ve heard it before from the Oracle of Omaha, “Do not save what is left after spending, but spend what is left after saving.” Everyone wants to believe that more income will ultimately lead to success. But it is what you do with the income you make that ultimately makes the difference. John D. Rockefeller was once asked how much money was enough and he responded, “Just a little bit more.” Everyone, at every income level, tends to feel the same. Personal accountability is something we should all strive for. This is your financial path, own it. Take advantage of opportunities as soon as they present themselves. Do not let the spirit of procrastination take over. The best time to start investing and saving was yesterday.

RESOURCES:

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Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing includes risks, including fluctuating prices and loss of principal.