Do you have a false sense of security that the market is going to offer smooth sailing? Think back on the not-too-distant past to the dot-com bubble, the Great Recession, and the 2020 COVID-19 pandemic. It’s choppy waters out there!
Taking too much risk? Investors taking on too much risk—not wanting to miss out on the market boom—often see their portfolios take a severe beating. If all investments respond to market declines similarly, you may increase the risk of losing your money. The objective is to take on the amount of risk that aligns you with your long-term goals.
Taking too little risk? While minimal risk can feel like a safe move, you could miss significant market rallies. For many investors, hunkering down only in safe-haven investments—ones that retain value during market turbulence—is a luxury but not realistic. With inflation eating away at cash every year, most investors need at least some growth-oriented investments.
Try to time the market? When markets rally or pull back, it can be tempting to seek opportunities to sell high and buy low. The problem is that investors usually guess wrong. A better approach may be making minor adjustments to help you stay the course.
Make emotional decisions? Past market crash experiences have made investors more susceptible to emotional investment decisions, which manifests as risk aversion. Fear can cause us to abandon an investment strategy when the outcome isn’t what we want. Greed can cause us to chase investment fads and take on too much risk.
Failed to diversify? By diversifying, you avoid investing aggressively into one sector. If your investments weigh heavy in one area during a market rise or fall, the dynamics could decimate your portfolio. Create a mix within each asset class to help overcome risk, opting for a good mix of small-cap, large-cap, international, and sector-diverse equities.
Ignored the impact of taxes? Remember that the federal government taxes investment income as capital gains. Thus, it’s critical to efficiently structure your investments to help minimize how much money you could lose to taxes. Tax optimization is an integral part of a forward-looking strategy that also assists with retirement and legacy planning.
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