The Dow Jones Industrial Average is in record territory and the S&P 500 is near a record as well. In markets these it’s especially important that you remember these five tips to avoid investing mistakes:
Don't invest because you feel like you've “missed the train.”
Recent inflows to equity mutual funds might indicate that some investors have begun to invest or increase their stock investments because they don’t want to miss the rally. Sorry folks, you likely already have (or least a substantial part of it). The current rally just turned four; investing because the market is hitting highs is generally a formula for a bad outcome.
Don't assume dividend-paying stocks are a good substitute for bonds.
There is nothing wrong with dividend paying stocks. The issue is that with interest rates at historic lows, investors are being encouraged to use them as a substitute for some or all of their fixed income allocation. These stocks are often less risky than indexes such as the S&P 500, but they are still stocks, and are subject to the risk factors inherent in any equity investment. A move of this sort will likely serve to increase the overall riskiness of your portfolio.
Don’t believe everything you hear from celebrity pitchmen.
Whether it’s the god-like Mike Ditka here in Chicago hawking equity-indexed annuities, Tommy Lee Jones using his credibility on behalf of Ameriprise, or the E-Trade Baby telling how financial advisers are overcharging you, look behind the pitch at the product or service they are trying to sell to you. Make sure that you understand what you might be buying and if this product or service is right for you. In the case of the E-Trade commercials when I investigated their advisory services I found that their fees ranged from reasonable to on the high side for services offered.
Just because you can do something doesn’t mean that you should.
I’m paraphrasing USA Today’s John Waggoner in an excellent column he wrote on self-directed IRAs in 2012. This phrase could cover of lot of investment products and alternatives. Self-directed IRAs are accounts offered by certain custodians that will hold alternative assets such office buildings, small businesses, and unregistered securities. Fraud is not uncommon here and the SEC has issued this investor alert (PDF) about self-directed IRAs. There are certainly legitimate providers and custodians of these accounts. For some investors this might be a legitimate route to go. For most investors, in my opinion, this is a slippery slope at best. Real estate investments in your IRA? Do you not remember the recent financial crisis? Using your retirement savings to fund a business? While no one starts a business thinking about failure, it is a reality for many. If you use your IRA to fund a business and it fails, you now have a failed business and no retirement savings.
Don't invest in anything that you don’t understand.
This applies to both do-it-yourself investors and those working with a financial adviser. In the latter case, if your adviser can’t or won’t explain a proposed investment to you in a fashion that you can understand, don’t allow them to invest your money in that vehicle. Sadly the news is filled with stories of advisers who placed their clients into complex investment vehicles that were highly risky and by most any standard not appropriate for that client. I’m not saying that because an investment vehicle is complex or hard to understand someone is trying to scam you. But again, it is your money and a competent adviser should want to and be able to explain any their strategy in terms that you can understand. Don’t be shy about pressing them for an explanation if one is not forthcoming.
Being a successful investor is tough enough, making any of these mistakes just makes things that much harder.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans.