Below is a guest post from Jon Stein, chief executive officer at Betterment.
As CEO of Betterment, I talk to customers and individual investors every day. People always want confirmation that they are taking the right approach, and making smart decisions with their money, especially in regards to investing. Here are the top 5 investing mistakes people make:
• Spending Too Much – People regularly overspend and don’t save enough money to achieve the goals they have planned for the future. Whether their goal is to afford retirement, college tuition, or big-ticket purchases, saving with an eye towards future financial needs is key.
• Not taking enough Risk – People don’t take enough investment risk with their savings to achieve their goals. Instead of investing in stocks and bonds, they park too much of their money in a savings account, which has its own risk: not keeping up with inflation. Under-investing is what happens when people fail to see the huge opportunity cost of parking money in savings.
• Micro-Managing Investments – People often buy high and sell low (the opposite of what they’d like to do). In the big sell-off of 2008, people ran from stocks. Now some are pouring back in. But the biggest returns have already been made – if you had stayed invested at the market bottom in 2008, you could have doubled your money! The best thing to do is to stay the course, despite your impulses to the contrary. Contribute regularly, preferably via auto-deposit, and rebalance your funds quarterly.
• Investing in the wrong things – People frequently chase “winners” and get caught up in the “game” of investing, making choices based on things like “this fund is up 30% in the past year vs. another that’s up only 20%,” “this fund is rated higher,” or “I like my iPhone, I believe in the company, and so I’ll buy Apple stock.” These are common and uninformed ways to pick mutual funds or ETFs. People should instead 1) select the right balance between asset classes (stocks, bonds, cash, real estate) for their risk tolerance and 2) diversify as broadly as possible.
• Failure to maintain – People tend to slack off after they’ve set up their accounts. That’s like joining a gym and then never going to work out – you get little benefit. It’s important to stick to rebalancing, contribution and diversification routines, or, if you’re subject to slacking, like most of us, chose a service that does these important things automatically for you.
I created Betterment to address these common mistakes. With Betterment, you’re seamlessly invested, diversified, and rebalanced. Betterment protects you from bad and impulsive choices, enables automatic deposits, handles the complexities for you, and gives you appropriate advice for your financial situation.
