5 Ways Rookie Investors Can Avoid Costly Mishaps

Following these guidelines can help build a strong portfolio and maximize returns.

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Creating an investment portfolio can be a daunting task, especially if you're counting on it to provide essential income later in life. Making the right initial decisions can mean better results and less worry later. A common initial investment is through an employer-sponsored 401(k) plan, which has tax advantages and may include a contribution match from your employer. Regardless of how your investing journey begins, the following guidelines can help you start on the right foot and avoid some of the most common investor oversights.

Check up on your financial advisor's background. It's not uncommon to ask for help before investing for the first time. That guidance could come from a close friend or family member, but if you choose to work with a financial professional, make sure you check out his or her background before moving forward.

Lori Schock, director of the Security Exchange Commission's office of investor education and advocacy, says you should ask to see the advisor's licensure documents and then independently verify the information. "Whether they had problems with regulators in the past, or whether they've had their own financial issues in the past, it's all publicly available," she says.

[See: How to Invest Your First $1,000.]

Avoid potentially biased or vague company websites and utilize government sources instead, such as the investment professional background check tool at investor.gov. "If you end up going off information from another area, you could end of working with a con artist," Schock says. "That's the worst-case scenario of what could happen. You hook up with a fraudster and essentially put your life savings at risk."

All legitimate investing professionals are required to be licensed with either the Security and Exchange Commission or your state's securities regulator, so if you can't find the professional in either of those areas, acknowledge that red flag and hold onto your wallet.

Also, be sure to ask about the fees financial advisors charge. If the costs are too high, examine your employer's retirement plan because it may provide access to a financial advisor at a lower cost.

Diversify your portfolio. Diversification within an investment portfolio is crucial for both security and profitability. By filling your portfolio with varied securities that have low correlations, which are numerical measures of how two investments move together, you can achieve a more efficient risk and return trade-off.

But don't get carried away. "If a 401(k) gives people 10 investment choices, a large percentage of people would simply put 10 percent into each choice and not have any rhyme or reason for the mix," says Casey Mervine, a Charles Schwab financial consultant.

On the other hand, also be wary of allocating your assets to a small number of investments. "Look at the folks who were employees at Enron who not only had their outside investments and stock but also their 401(k)s invested in Enron stock, and so then they lost their job, their outside money and their retirement plan," Schock says. Diversify your portfolio by allocating investments among different assets classes, such as stocks, bonds and cash.

"Another good rule of thumb is to watch how much you own of one particular asset or especially one area of stock," Schock says. "Diversify your products with different maturity dates and investing horizons based on how long that money needs to grow." Investing in a handful of mutual funds that represent different company sizes, domestic and international stocks, and different types of bonds can also help offset losses if one area of the market begins to struggle more than another. To maintain a diverse portfolio, conduct routine checkups and rebalance as necessary.

Read the fine print. If you understand the fees associated with investing, you can better understand how to maximize profitability. "Too often we see people not considering how costs, fees or even taxes will impact their returns down the road," Mervine says.