Are you as good an investor as you think? Do you consider yourself a well-informed investor able to anticipate and avoid nearly all pitfalls associated with investing? Chances are, you are making one of
common errors that could cost you hundreds or even thousands of dollars, or worse yet, your financial independence, control and security.“I see people making same costly mistakes over and over,” says Scott Frush, investment advisor and author of Optimal Investing: How To Protect and Grow Your Wealth With Asset Allocation (Marshall Rand Publishing; available by calling 1-800-247-6553). ”But small leaks can sink great ships.”
Here Scott Frush shares eight common, yet costly, mistakes investors make when designing their investment portfolios and reveals how to avoid them.
1. OMITTING APPROPRIATE ASSET CLASSES AND ASSET SUBCLASSES. Numerous landmark studies have concluded that how you allocate your portfolio, rather than which investments you select or when you buy or sell them, determines majority of your investment performance over time. As a result, make every effort to allocate your portfolio to all appropriate asset classes and asset subclasses.
2. SELECTING INAPPROPRIATE ASSET CLASS WEIGHTINGS. By selecting inappropriate asset class weightings a portfolio may earn a lower return and experience greater risk than expected. Consequently, be careful not to over or under weight any asset class, thus enhancing your portfolio’s risk and return trade-off profile.
3. UNDERESTIMATING THE IMPACT OF INFLATION. Inflation can erode real value of your portfolio over time, thus placing your future financial security at risk. As a general rule, longer your investment time horizon, more you should allocate to equity investments. For shorter investment time horizons, emphasize fixed-income and cash and equivalent investments.
