Chad Carlson

It's hard to make money when investing. If it were easy, everyone would manage their own portfolios. Many savvy investors will tell you that one critical trait of successful long-term investing is to keep your mistakes to a minimum. Let's look at a few common errors that you will want to try to avoid.

Investing on the basis of tips and rumors: There's hardly any chance that the average investor will get advance or inside information about any company whose stock is publicly held. And even if you do, it probably won't do you much good. Professional speculators are watching the market news all day long, ready to buy or sell on a minute's notice. There are also specialists in each stock listed on the various exchanges. If a rumor is circulating about a company or a spike in trading volume occurs, the specialist will speak with company management to get the facts. Be aware that no matter how hot a tip you hear, it's very likely that many people already knew about it before you did. And in case you actually obtain inside information, remember what happened to Martha Stewart.

Placing too much optimism in rising markets: Sometimes a rising stock market makes us think we're smarter than we may actually be. As a result, even when stocks are overpriced and overvalued, some people go right on buying. On the flip side, people grow increasingly pessimistic as the market drops and tend to sell at the bottom when stocks are cheapest. Following the "herd mentality" frequently results in a negative outcome. Successful investors buy on dips and sell on spikes.

Buying "penny stocks": A low-priced stock may look like a bargain, but just because a stock has a low price doesn't necessary mean it's a good time to buy. The price of a stock is what the market believes a company to be worth divided by the number of shares outstanding. Just remember, a stock that sells for pennies does so because that's what the market thinks it's worth.

Holding on to yesterday's winners: Some investors grow attached to their stocks, much like they do their household pet. As a result, they hold on to companies long after the potential for growth and profit has passed. A similar mistake is to fail to sell a stock because you hate to admit you were wrong to buy it in the first place. If you don't know why you're investing in a particular stock or how it fits into your overall investment strategy, it's best avoided.

Not doing your research: Many investors fail to fully research their investments before buying. Not only do you want to look into the investment opportunity before committing capital, you should also research the broker or advisor who's giving you advice. Many investors don't take the time investigate their advisors' educational background, how long they've been in business or how long they have been handling other people's money. It is crucial that you invest your time before you commit your money.

Investing from the wrong bucket: Too often, investors tie up money that should be set aside for an emergency fund or some other predictable expense. If you place your emergency funds in stocks, long-term bonds, or real estate, an unexpected event could force you to sell your investment at a time when you might prefer to keep holding.

Another common mistake is placing long-term retirement assets in low-interest CDs and money market accounts in lieu of more appropriate growth and income investments like high-quality, dividend paying stocks.

Not having a plan: Without well-thought-out goals and long-range objectives, it's nearly impossible to decide how you should best invest your assets. Whether you're investing through your clinic's or hospital's retirement plan or deciding on the best approach for your after-tax earnings, you are doing yourself and your family a disservice if you haven't developed a well-thought-out plan to achieve your objectives.



Chad Carlson is a financial advisor with Delta Trust Investments, Inc. in Little Rock.


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November 2006