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Mark Zaifman's thoughts on money, global economic trends and politics

The Worst Mistake You Can Make When Investing Your Hard Earned Money

Mark Zaifman   |    Wed, May 11, 2011 @ 02:38 PM

common investment mistake

Don’t Make This Investing Mistake

The number one mistake investors make (and have been making for a very long time) is chasing investment returns, which in my humble opinion, is a risky approach to investing. First of all, in this scenario, you very often end up being a day late and a dollar short. In other words, the latest investment flavor of the day was on a winning streak and as soon as you purchased that stock or mutual fund, returns went south and you missed the ride. Then you move to the next hot stock, mutual fund or ETF and the same thing happens all over again. This cycle repeats itself until you eventually lose enough money and throw in the towel.

The other mistake very similar to this is moving all your investments to the hottest broker or investment advisor that might be on a winning streak that year. Like a gambler looking to hit it big, you ignore all the potential risk and only think of how much you’re going to ‘win’.  You’re once again chasing investment returns and trying to find the shortcut.

What amazes me over and over again is how much of a return most people think they need vs. the return they actually need to meet their financial life goals.

What to Do? - Plan For Success

The alternative to looking for a short cut and chasing returns is to assess where you are financially and plan your financial future one step at a time. Designing and developing a comprehensive financial plan means you will discover exactly how much of a return on investment you need to reach financial independence.

Since the beginning of this year, I’ve received a large amount of calls from potential clients regarding my investment management services. This is not surprising at all since every week, 10,000 baby boomers head into retirement and the majority of our clients are indeed boomers looking for a fee-only registered investment advisor to manage their nest egg.

Now keep in mind, we are an independent comprehensive financial planning firm that provides investment management services. That means we focus our attention not only on your investments, but on your cash flow and all that entails, e.g., net worth, spending, debt, education funding and retirement income planning.

In essence, our holistic approach to financial planning means we look at the big picture in terms of your personal finances, not just the money you have to invest. The benefit of this approach is invaluable. The old model that remains prevalent in the financial services industry though, especially among the usual suspects, is the total opposite of this approach.

The Man Behind the Curtain

To understand why so few major financial firms offer an independent and objective approach to financial planning, one needs to understand what’s really going on behind the scenes of these firms. The bottom line is these firms are packed with financial sales people that call themselves ‘advisors’ looking out for their bottom line, not yours.

These ‘financial advisors’ have sales quotas to meet and they earn a majority of their income via commissions. I could write a book on the conflict of interest inherent in this old business model. Suffice it to say, more and more investors are now looking for independent, objective and conflict free financial advisors to help them plan their financial future. I’m happy to see that the financial consumer is becoming much smarter.

And back to returns for a minute. Without knowing how much of a return you really need to meet your financial life goals and to secure a comfortable and safe retirement, people often take way more risk than is necessary and become vulnerable to sales pitches that very often are too good to be true.

As the saying goes; a fool and his money are soon parted. Instead of looking for short cuts, invest the time in your financial future by understanding that there are many roads that lead to financial independence. The sooner your design your financial road map, the sooner you’ll have peace of mind.


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Mistake graphic from opensourceway