What Mistakes Can You Avoid in Your Financial Future?
What Mistakes Can You Avoid in Your Financial Future?
Recent economic times have been trying, to say the least. Confidence in the U.S. economy is plummeting, making it increasingly difficult to know if you are doing the right thing with your money. You might ask yourself, “Should I even keep my money in the stock market?” or think, “Perhaps hiding cash under the mattresses a better alternative.”
Now is not the time to go to the mattresses.
An economic downturn reveals common mistakes investors make.
Jon Stein,CEO of Betterment.com, has seen these mistakes first-hand. Check out the top 5 mistakes, according to Jon, and how to avoid them.
Jon Stein is the Chief Executive Officer of Betterment.com, which he founded in 2007. Prior to creating Betterment, Jon spent his career developing financial products, platforms, and investment strategies for international banks, brokers and other financial institutions, and advising them on strategies to mitigate the risks inherent in their products. Most recently, Jon held the position of senior consultant at First Manhattan Consulting Group, where he counseled a number of the world’s most prominent financial institutions. Jon has in-depth knowledge of retail banking and investing and is a Chartered Financial Analyst (CFA). Jon is a graduate of Harvard University and Columbia Business School.
Mistake #1: Spending Too Much
Mistake #1: Spending Too Much
People regularly overspend and don’t save enough money to achieve the goals they have planned for the future. Whether their goal is to afford retirement, college tuition, or big-ticket purchases, saving with an eye towards future financial needs is key. Think about the long term, rather than living in the moment.
Mistake #2: Not Taking Enough Risk
Mistake #2: Not Taking Enough Risk
People don’t take enough investment risk with their savings to achieve their goals. Instead of investing in stocks and bonds, they park too much of their money in a savings account, which has its own risk: not keeping up with inflation. Under-investing is what happens when people fail to see the huge opportunity cost of parking money in savings.
Mistake #3: Micro-Managing Investments
Mistake #3: Micro-Managing Investments
People often buy high and sell low (the opposite of what they’d like to do). In the big sell-off of 2008, people ran from stocks when the prices dropped. But if they had stayed invested at the market bottom in 2008, they could have doubled their money! The best thing to do is to stay the course, despite your impulses to the contrary. Contribute regularly, preferably via auto-deposit, and rebalance your funds quarterly.
Mistake #4: Investing in the Wrong Things
Mistake #4: Investing in the Wrong Things
People frequently chase “winners” and get caught up in the “game” of investing, making choices based on things like “this fund is up 30% in the past year vs. another that’s up only 20%,” “this fund is rated higher,” or “I like my iPhone, I believe in the company, and so I’ll buy Apple stock.” These are common and uninformed ways to pick mutual funds or ETFs. People should instead 1) select the right balance between asset classes (stocks, bonds, cash, real estate) for their risk tolerance and 2) diversify as broadly as possible.
Mistake #5: Failure to Maintain
Mistake #5: Failure to Maintain
People tend to slack off after they’ve set up their accounts. That’s like joining a gym and then never going to work out – you get little benefit. It’s important to stick to rebalancing, contribution and diversification routines, or, if you’re subject to slacking, like most of us, choose a service that does these important things automatically for you.
