Recently, I was a guest lecturer for a finance class at Oakland University. I talked to a number of undergrads about investing. During my talk, I had a Q&A session so I thought I would answer some of those questions here as well. One of the students asked me to name the top three mistakes investors make. The following was my answer.
I believe the first mistake the average investor makes is they focus too much on their investments. I know this sounds strange, but it’s not. As investors, the most important thing is not what investment we use but rather, that we have the right overall strategy for our portfolios. The key to success for an investor is an overall strategy based upon their individual goals and objectives. Unfortunately, the great majority of investors have no strategy and as a result, they fail. Investors not only need a strategy for what they buy, but they also need a strategy for the sell side as well. If investors spent more time on their overall game plan, they would be more successful.
The second mistake I see investors make is they focus too much on taxes. Many people are under the mistaken belief that their goal is to lower their taxes. That is wrong. Your goal is to maximize your net worth. When investors concentrate on taxes they inevitably make the wrong decision. What investors need to focus on is what ends up in their pocket, not taxes.
The third common mistake I see investors make deals with who they take financial advice from. The same brother-in-law you wouldn’t loan $100 to because you know you’ll never get it back is not the person you take financial advice from. The same applies to talking heads on TV. Just because someone’s on TV doesn’t mean that they’re an expert. After all, it wasn’t too long ago that so-called experts were telling us the Lions were a playoff team.
Another question that I was asked was why so many investors fall prey to investment scams. My answer to that was twofold. First, I told the student that so many people fall for investment scams because they let greed dictate their investment decisions. People must be realistic when it comes to their returns and when someone promises high returns with no risk, a warning bell ought to ring. Unfortunately, all too often when the warning bell is rung, too many investors ignore it.
The other reason why I believe that so many Americans fall prey to investment scams is a lack of knowledge about investing in general. I believe if more Americans understood the basics of investing, they would be in a better position to protect themselves. Investors would do themselves a great service by becoming educated about investing and personal finance.
I ended my talk to the students by reminding them that the best investment they will ever make is what they are doing at Oakland University and that is getting a good education. That’s something all investors should keep in mind; the more they know about investing, the better investor they will be. I also reminded them that education does not end upon graduation, educating yourself and staying current is a lifelong pursuit.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org