Three Common Mistakes Investors Make

12/4/2017
by The Milestone Group

Investors often make inadvertent mistakes. For one, they often rely too much on their intuition and emotions instead of focusing on tried-and-true principles that have the potential to improve their portfolio’s long-term performance. 

“It’s easy to let emotions drive investing decisions,” says David Sego, managing director of The Milestone Group. “Unfortunately, emotions often lead people to sell their investments at the wrong times or miss out on key opportunities.” 

Rather, Sego says, investors should focus on building a portfolio that will serve them well over the long haul — and not let themselves fall prey to common mistakes.

Here are three mistakes he sees investors make. 

1. Not diversifying broadly enough 
Many investors keep a portfolio of stock and bond investments, but they don’t take advantage of “alternative” asset classes such as commercial real estate which may be accessible to many investors in different types of investment vehicles. While not suitable for all investors, these alternative asset classes can reduce a portfolio’s volatility and potentially boost long-term investment returns because they generally move independently from stock and bond markets. “Even keeping a small position in alternative asset classes can help with diversification,” he says. 

Moreover, investors should make certain they are well diversified among the various types of stocks and bonds. Holding an array of bonds offers the same type of diversification benefits as holding an array of mutual funds with a broad mix of stocks. 

2. Not utilizing tax-efficient accounts and investments 
Taxes can take a significant bite out of investors’ returns — especially those in higher tax brackets. Thankfully, there are several ways to reduce the tax consequences of investing: 

  • Use tax-advantaged accounts. 401(k) and individual retirement accounts (IRAs) provide either tax-deferred growth or tax-free earnings (Roth IRA) to investors. (Keep in mind that IRAs typically have income limitations.) Self-employed individuals can also set up tax-advantaged accounts, such as solo 401(k) plans and SEP-IRAs. Beyond helping to reduce tax obligations on income, these accounts can be good places to hold investments that generate the most taxable income.
  • Consider tax-efficient investments. Certain investments generate fewer taxable gains than others. Certain funds specialize in reducing tax liabilities as well.
  • Harvest gains and losses. Investors can time the taking of capital gains and losses in their investment portfolio strategically to reduce tax consequences. For example, any capital gains in a year can be offset by up to $3,000 in capital losses. Any unused losses can be carried forward to offset future gains for up to five years.

Managing taxes can also benefit your estate plans and eventually passing along your assets. Any tax savings you generate today will only increase the value of the estate you leave behind. 

3. Not reviewing portfolio frequently enough 
Personal circumstances, market performance and changes in tax law can affect an individual’s investing goals and risk tolerance. A marriage or divorce, for example, may affect someone’s ideal asset allocation strategy or new tax laws may affect his or her long-term investment strategy. 

The Milestone Group’s financial advisors can help clients perform a portfolio review and identify investment opportunities. “Working with an advisor helps take the emotion out of investing so that investors can focus on making sound decisions,” Sego says. “The advisor can provide guidance and expertise while protecting an investor’s best interests.”

It is important to note that it is possible to lose money when investing in securities. Also, the investment concepts described in this article do not ensure a profit and cannot protect against losses in a falling market. Past performance is not a guarantee of future results. 

 
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Disclosure The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. The content in this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice.