A New Year typically brings hope that if things were difficult last year, they may improve this year – and if things were good last year, they'll surely get even better! However, if you don't plan and act appropriately, you'll soon be lamenting 2016 and longing for a better 2017.
To get you started in the right direction, here are 7 investment mistakes to avoid throughout 2016.
- Procrastination and Indifference – If your investments run on autopilot, the best you can reasonably hope for is mediocre performance. Identify your priorities, analyze your investments and their performance over time, and have a long-term investment strategy.
- Failing to Follow a Plan – If you have a plan but don't stick to it, you aren't much better off than having no plan at all. Short-term temptations are always available. If you are altering your financial plan, have a valid, well-thought-out reason, and do your due diligence in checking out the options. Don't hesitate to seek professional help with a financial plan, and resist the urge to abandon it for a perceived short-term gain.
- Mistaking Price for Value – Stock prices reflect what people will pay for them – which may or may not be rational. Value is what the company is objectively worth, and is generally set by the long-term investor. A stock may be trading over or under its historic value, and you should understand why before you buy or sell. Ignore your TV set blaring today's price fluctuations.
Perform due diligence based on company-provided information as well as broader market conditions. What new products or services are in the pipeline? How does actual performance match management guidance each quarter? How stable and effective is the current management team, and are there management starts on the horizon? What is the company's price-to-earnings ratio, and might it be under-valued? Is there pending litigation, or are large expenditures upcoming? By looking more deeply into companies, you stand a far greater chance of finding those that are undervalued.
- Not Diversifying Your Portfolio – It is dangerous at any stage to have all your investments in one metaphorical or actual basket. So most experts suggest diversifying by asset class (such as stocks, bonds, real estate and commodities). Within the asset class of stocks, they further advise diversification by sector. That means don’t just spread your money among different companies; spread it among multiple market sectors as well (such as energy, technology, finance, agriculture, etc.). Within a bond portfolio, it’s important to diversify by issuer, maturity and credit risk. It’s also smart to diversify among Treasury, corporate and municipal issues, depending on your tax position. Finally, in your real estate holdings, you’ll want to avoid undue exposure to any one geographic area or type of property (such as single-family, multi-family or commercial). Put simply, there is safety in diversity.
- Herd Mentality– Warren Buffett didn't achieve his wealth by following a herd mentality – he is able to identify value and pursue it moving against the herd. Very few of us (if any of us) have the investing skills of Warren Buffett, but we can all have the resolve to investigate in more detail before purchasing.
- Thinking Short-Term – Take the long view with your investments and don't try to time the market. Even trusting a hot list based on one year's performance is not wise. Look at a stock's performance over the longer term before you buy or sell, and recall the price/value advice above.
- Fooling Yourself – Assess your investment performance honestly, especially if you are handling your own investments. How do you compare to the market? Is your performance consistently good over time?
If not, think about why. Do you hang on too long to bad investments, unable to move on? Do you hang onto investments past their peak, afraid to sell because they may go higher still? Do you impulse buy? Is it just a run of bad luck or would you be better off paying for advice? (As the old saying goes: if five marriages haven’t worked out for you, maybe you're the reason.) If you can't be objective about it, seek out a trusted professional to give you straight talk.
In essence: Make a plan and stick with it, do due diligence with all your actions, take a long view, understand value, and be honest with yourself. If you stick to these plans all year, then you’re setting yourself up for an even better 2017!