During his 13 years in the financial services business, Steve Landy, senior financial advisor with Ameriprise Financial in Hartville, has seen investors make plenty of mistakes when it comes to investing their money.
His office manages more than $120 million in client assets, and he frequently meets investors who need more than a little guidance in the wealth management department.
Landy says he frequently encounters the same mistakes, and offers these tips to avoid these behaviors and minimize your investment risks.
- Having no investment strategy. Investors should have a financial plan or asset allocation from the beginning that takes into account their time horizon, risk allowance and future contributions.
- Investing in individual stocks. Landy often sees investors who want to buy a lot of one particular stock. When that stock underperforms or suffers losses, they are turned off from the whole investment process.
Landy suggests that if investors are determined to buy an individual stock, they should buy it in companies or products they regularly use. For example, if you drink Starbucks coffee every day, buy Starbucks’ stock. Don’t buy stock in a single company you know nothing about.
- Buying high. In general, it’s better to buy what is not performing at its peak. Whatever was bad last year may be good the next year, and stock that is very high now is probably ready to level off. In the investment industry, winners always seem to rotate, says Landy.
- Not selling low. Nobody wants to sell a stock for a loss. Instead, investors will try to hold back until they break even. If the stock is not going to come back within a reasonable timeframe, it’s better to cut your losses.
- Acting on tips. Typically, if you are hearing about it, so is everybody else. Unless your source is a financial adviser, it is very risky to act on the tip.
Landy prefers to start new customers in mutual funds because they are more diversified. There are typically 80 to 100 stocks per mutual fund instead of just one individual security that you’re frequently paying fees on.
- Paying too much in commission. Rather than paying a per-transaction fee, it’s usually better to pay a flat fee or flat percentage fee per year. That way, the financial adviser really is working in the client’s best interest rather than just trying to build commission.
- Decision-making by tax avoidance. Landy sees many clients who have doubled their money on a particular stock but won’t sell because they don’t want to pay the tax on the gain. Capital gains are very low right now, so it’s a good time to harvest your gains.
- Having unrealistic expectations. Everybody wants a 12 percent return with no risk, but that’s not likely to happen in today’s market. If you can get 8 percent to 9 percent, or really anything above zero, Landy says consider yourself in good shape.
- Not knowing tolerance for risk. Investors frequently buy something and don’t understand that if it can go up 10 percent or 20 percent, it can also go down 10 percent or 20 percent. It comes down to what the timeframe for this money is. If it’s long-term, you can invest more aggressively. If you’re saving for a more short-term goal, you need to be more conservative.
- Putting off retirement planning. For many investors, 30 or 35 years seems so far down the road. The first thing you always should do is contribute to the 401(k) at work. And Landy believes people should work until age 70 because they want to, not because they have to.
HOW TO REACH: Steve Landy, (330) 877-8507; Ameriprise Financial, www.ameriprise.com
