5 Dumb Investing Mistakes to Avoid

We don’t call anyone dumb, because when it comes to investing, really “smart” people make as many or more mistakes as investing novices. The underlying issue? Our behavior and choices, which are often misguided by emotions. Investment behavior’s impact on investors’ returns have been well documented over the past few years. This is evidenced by the book referenced in article below, Why Smart People Make Big Money Mistakes, as well as by our friends at BehaviorGap.com. In fact, Carl Richards, the founder of BehaviorGap.com, has created such an awareness that he was named as one of the top “Movers and Shakers” of 2010 by Financial Planning magazine.

So, back to my point, the following article provided some great explanations of some common mistakes of investors. Here is the issue:

Many of these mistakes seem to be common sense at the time, but fly right in the face of prudent investment principles. Unfortunately, your 401(k) is not like your car, it doesn’t start making strange sounds if you try fixing something and do it incorrectly. It silently continues on its way, decreasing your “fuel efficiency” and/or ruining your “alignment.”

It is becoming more and more apparent by employers’ committees who are in charge of overseeing your company’s 401(k) plans as well. While behavior’s impact was somewhat of a foreign concept 3-4 years ago, it is now a common theme in our conversation with employers when they are considering our BeManaged service for their retirement plan. It is simply no longer realistic to assume investors are rational.

So here they are, five investing mistakes you should avoid:

1. Allowing the Pain of Investment Losses Hurt You More Than Investment Gains Bring You Joy – Think about it. Did you experience more pain following your ’08 statement or more joy after your ’09 statement (assuming you stayed invested both years)?
2. Placing Too Much Emphasis on Unusual Events
3. Being Paralyzed by Investment Choices – Too many choices can be intimidating. For example, I love mexican food. One of my favorite local mexican restaurants has a huge menu, so large that it has taken me 20 minutes just to figure out what I want to order, and I tend to be pretty decisive. Hence, while having choices are great, too many can lead people to not making one at all (or just sticking with the chicken nachos).
4. Ignoring the ‘Small’ Numbers – Mutual fund expenses are important to monitor, as we have noticed that people will not give much credence to percentages, but when you mention that expense in dollar terms, eyebrows raise. The lowest expense does not a good fund make, but it definitely doesn’t hurt.
5. Failing to Understand the Odds Against Beating the Market – This point is classic. The Jim Cramers of the world have infused people with the idea that beating the market is easy. What is never discussed is risk. If we could choose, we would want to make all of the return of the market (or more), but avoid any losses. Sounds great, huh? Unfortunately, it’s not possible without taking a lot of risk, which most people are not comfortable doing.

At the end of the day, the only things you can control when it comes to investing in your 401(k) or otherwise, are the following:

• Risk
• Behavior
• Contributions

In our experience, the most successful 401(k) holders are not those that try to beat the market and chase returns, but instead those that focus on maximizing their contributions to the account.

Read the Entire Article from MoneyWatch.com