10 top investing blunders

By Cheryl Allebrand

Everyone knows the secret to investment success is to buy low and

sell high. The problem is most of us lack clairvoyance.

We asked experts to weigh in on some of the most common mistakes

investors make, and while it's easy to see that chasing hot stocks

(the most frequently cited mistake) would be an exercise in futility,

they reported other less obvious pitfalls to watch out for.

There are never any guarantees when investing, but avoiding these 10

missteps will better your chances of success.

Investing blunders

1. Mismatching investment with goal

2. Discounting fees

3. Letting investments languish

4. Paying taxes

5. Failing to strategize

6. Misreading the label

7. Neglecting research

8. Putting it off

9. Ignoring your portfolio

10. Getting emotional

1. Mismatching investment with goal

Need that money in the next couple years? Don't put it in a hot

emerging-markets fund.

Consider when you'll need access to your money. This will help you

avoid unnecessary transaction fees, penalties and risk.

"If you pick the right investment vehicle for the right timeline,

you've got it 90 percent in the bag," says Richard Salmen, a

Certified Financial Planner and Financial Planning Association board

member. "If your goal is only six months to two years off, you don't

want to put your money in an investment vehicle that could fluctuate

enough that you might miss it."

For some goals, such as paying for college, it may make sense to use

a mix of investments, says Gail MarksJarvis, author of "Saving for

Retirement (Without Living Like a Pauper or Winning the Lottery)."

"If you are saving for college and your child is within three years

of going to college, you've still got seven years until that last

year of college," she says.

So while the bulk of short-term college savings should probably be

very safe in CDs or short-term bonds or a high-yielding savings

account, maybe some of that money could be invested in stocks. "Just

remember the rule of thumb," she says, "that money you'll need within

five years shouldn't be in stocks."

2. Discounting fees

Fees may sound minuscule at 1 percent or 2 percent, but they can

gouge your returns by thousands of dollars.

"It's hard to beat the stock market," says MarksJarvis. "There's one

thing you can control and that's what you pay to be a part of the

stock market, and that's where the expenses come in."

While all mutual funds have expense ratios, which cover investment

advisory, administrative services and other operating costs, some are

much higher than others.

"Let's take a $10,000 investment that earns an annual return of 8

percent before expenses for 20 years," says Greg McBride, senior

financial analyst for Bankrate. "If the money is invested in a fund

with an expense ratio of 1.25 percent instead of an index fund at

0.25 percent, the investor would incur an additional $4,128 in costs

over that 20-year period. But the ending account value of the higher

expense fund would be $8,000 less than if invested in the lower

expense fund because of the loss of compounding on the money paid out

in expenses each year."

To complicate matters, some funds impose sales charges or loads. Load

funds are only available through an investment adviser or broker who

is compensated by sales commissions.

Picking no-load funds is one way to save money on fees. Instead of

going through a broker, call a mutual fund company directly to

purchase a fund.

"If you were paying your broker 5.75 percent for a load, you would

say to yourself, 'Well, that's the cost to play, I might as well pay

it,'" says MarksJarvis. "But if you were putting $10,000 into the

fund, that would mean you were giving your broker $575 to pick that

fund for you and that you were putting $9,425 to work."

While it might be worth paying a load if you don't have the time or

inclination to make your own investment choices, just remember, it's

hard, even for a skilled money manager, to make up for those extra


"The fees will be higher for those funds," says John Pallaria,

adjunct professor in the CFP program at Boston University, "but in

return they're getting competent advice which will, in theory, give

better results to offset the cost."

3. Letting investments languish

If you've arranged to have money siphoned out of your paycheck

directly into a savings account -- pat yourself on the back for

taking that step. But don't stop there.

Saving money is a great start, but if you're not investing it wisely,

you'll miss out on long-term gains, says MarksJarvis.

She illustrates this point with the example of a 35-year-old who, by

holding $30,000 in a savings account until she retires, will have

$46,000 after earning interest and paying taxes (assuming a 2 percent

average annual return and a 25 percent federal tax bracket).

"On the other hand," MarksJarvis says, "if you put that same $30,000

into a 401(k) or an IRA, you wouldn't be paying taxes on the money as

it builds up year after year. By investing in a simple stock market

(index) fund, that very same $30,000 would likely, if it followed

history, turn into about $540,000 (assuming retirement at age 65 and

an average annual return of 10 percent)."

4. Paying taxes

Why give Uncle Sam money any earlier than you have to? Instead, put

your money to work for you.

In the above example, what if the investor bought the same mutual

funds in a regular taxable account instead of investing in an IRA?

MarksJarvis explains: "If they earned the same return on their

investments, instead of having $540,000 they would end up with about

$260,000 because it would be taxed. This again assumes a 10 percent

average annual return, retirement at 65, and a 25 percent federal tax

bracket. Taxes take a huge amount out of the wealth that builds up

year after year after year."

People sometimes forget to factor in the upfront tax benefits of 401

(k) plans, says Salmen, who also serves on the board of directors for

the Financial Planning Association. "One of the typical mistakes that

I see people making is paying extra on their mortgage but not funding

their 401(k) or putting enough into it. Mortgage interest is usually

your cheapest interest rate and there are tax deductions on top of

that. Money that you put into a 401(k) you're getting an upfront tax

deduction on," he says.

Of course, you'll have to pay taxes eventually -- but not until it's

time to take withdrawals from your tax-deferred retirement plan.

5. Failing to strategize

It's time to pick funds from your 401(k) lineup. All you do is pick

the ones that performed the best, right?

Wrong. Before you research the investment, there are a couple of

things to think about. First, plan your investment strategy.

"For any investment program, sometimes people jump right to the

investment they choose," Pallaria says. "But they need to determine

what asset classes they want to cover before jumping to investments.

Once you've got the asset classes, now go pick the investments that

are best in these categories."

Next, make sure you're comparing apples to apples.

Some funds don't make as much money as others -- by design. A bond

fund cannot compete with a stock fund because of the nature of their

respective holdings. However, different types of funds serve

different purposes. The bond fund can have a stabilizing effect on

one's portfolio.

"For example," MarksJarvis says, "someone might have a bond fund that

perhaps an adviser put them in because that's supposed to be the safe

part of their money. And they'll look at it and they'll say, 'Well,

I'm only making 4 percent in that fund and I have this stock fund

that's up 12 percent. Why not go with the 12 percent?'

"Well, there's a perfectly good reason," she says. "That 12 percent

money is not going to be as safe."

Determine your asset allocation strategy.

6. Misreading the label

You bought a bunch of different funds -- so that means you're

diversified, right? Not necessarily.

You don't want to find out that you're overexposed to a particular

market sector after it hits a rough patch. Luckily, staying out of

this trap is a matter of learning to read the label.

"One of the typical mistakes that people make is they get a list of

mutual funds from their employer and they can't tell the difference

between them. They don't know the vocabulary," says MarksJarvis.

Expand your vocabulary by a dozen words and increase your assets:

Check out Bankrate's investing glossary.

Understanding the different types of asset classes will help you

strategize (see Tip No. 5). Different asset classes do better at

different times. Bonds may do well while the stock market is

suffering and large-cap firms may weather tough times better than

spunkier small caps. Boring bonds will never match stocks in a hot

market and small caps may be better poised to take off like a shot

than their larger, lumbering counterparts.

7. Neglecting research

Psssst. Wanna hear a good stock tip?

No, we're not going to tell you about the next Google. We're going to

tell you to do your homework.

"When making investments, look to invest in the company and not the

stock," says Shashin Shah, CFA, CFP with SGS Wealth Management in

Dallas. "Research the company," he says. "Look at the Internet,

anywhere from MSN to Yahoo Finance, purchase research reports. If

you're investing $1,000, you might want to spend $5 to read a

research report. Get information from the broker and how they made

the picks. Order the company report."

8. Putting it off

Retirement is decades away. You don't need to worry about it, right?

In the world of saving, procrastination is your worst enemy. If

you're smart, you'll get started early.

According to MarksJarvis, in order to accumulate $1 million at

retirement, you'll need to invest just $20 a week in a simple stock

market mutual fund when you're 19, about a $100 a week if you wait

until you're 35, and roughly $300 a week if you delay until age 45,

assuming a retirement age of 65 and an average annual return of 10

percent. (Of course, while 10 percent is in the ballpark of how the

market performed historically over many decades, there's no guarantee

that it will continue to do so.)

Here's how it plays out.

"Of course, you can catch up," MarksJarvis says, "but then you have

to dig in deeper and it's actually a little more painful than if you

were just saving small amounts to begin with."

But don't ever give up. A person who, at age 45, has accumulated

$30,000 can still end up with a nest egg of about $460,000, if they

put away $5,000 per year for 20 years, points out MarksJarvis. This

assumes an annualized return of 9.6 percent.

Many people delay investing because of debt, says Salmen, but there's

no excuse not to take the easy pickings.

Some people want to invest money but say 'I'm not going to do it

until I get my debts paid off, and it makes sense.' For most people,

they're never going to get there," he warns.

"At the very least, you should be taking advantage of the company

matches in your retirement fund, which deliver a guaranteed 50

percent return on investment in the first year. That's free money. I

don't know anywhere else you're going to get those kinds of returns."

9. Ignoring your portfolio

Buy and hold can be a smart strategy, but buy and ignore won't serve

you in the long run.

"I've had new clients walk in with statements in a box and they

haven't even opened their statements," laments Shah.

Without reviewing your holdings, you won't know if your portfolio

remains balanced, and you won't shift your holdings to achieve new

goals or help you cope with changing life events.

The experts differ on how often you need to do a portfolio review.

Shah recommends doing so on a quarterly or semiannual basis. Salmen

meets three times a year with his clients. But all agree that it's

important to review your holdings at least once a year, whether

they're within a company-sponsored retirement plan or outside of one.

"Perhaps you're invested 80 percent right now in equities, and

realize 'I need to think in five years now instead of 10 because I

want a vacation home' or 'I got laid off.' If you're looking at your

investments regularly, you can shift to fit your circumstances," says


Find out how to use investments to reach your goals.

10. Getting emotional

The market is ricocheting all over the place, and when the boss isn't

paying attention, you're online buying and selling in a frenzied

attempt to dodge the bullets.

"Emotion, both greed and fear, drive more of the decisions than

anything else," says Salmen.

He describes the all-too-common trap emotionally driven investors

fall into: "Most people don't earn what the market earns. They invest

too heavily in too risky investments that are doing well, then drop

out when they go back down. They take all their money out of tech

stocks, for example, put the money into bonds, then put money back in

stocks after prices have gone back up."

His prescription is to invest a little bit of money from every

paycheck, diversify, then leave it alone.

Pallaria recommends taking yourself out of the equation as much as

possible. "The best thing that people can do to make it easy on

themselves is to automate investing as much as possible. Have the

money automatically taken out each month or each quarter. That's

absolutely the best way," he says.

Called "dollar-cost averaging," this autopilot strategy enables you

to buy more shares when the market is down -- and that's the whole

idea behind buying low.