It is common for investors to express uncertainty over their ability to manage their portfolios during prolonged periods of market volatility. But prudent investors understand that making sound investment decisions shouldn't be based on the markets twists and turns. Rather, these decisions should stem from an understanding of investment fundamentals and an awareness of the mistakes others have made. Keeping a few common mistakes in mind and steps to avoid them may help you as you work toward your goals.
Mistake #1: Maintaining unrealistic expectations
There is nothing wrong with hoping for the best from your investments it is human nature. However, you could encounter serious long-term cash flow problems if you base financial plans for the future on unrealistic assumptions. According to an August 2004 Gallup poll, nearly one third of 800 investors surveyed expected to generate profits of 10% or more in their portfolios during the next year. How does that anticipated return compare with actual historical returns? Based on data from Standard & Poors and the Federal Reserve, from 1926 to 2003, a hypothetical portfolio divided equally among stocks, bonds and cash would have had an average total return of 7.3% annually*. While the composition of your portfolio may be different from the portfolio in this example, it is important to maintain realistic expectations in order to have the best chance at reaching your goals. Although past performance is no guarantee of future results, familiarize yourself with the historical performance of appropriate investment indexes or appropriate benchmarks and use their average long-term returns to help maintain realistic expectations for your own investment returns.
Mistake #2: Chasing hot investments and overtrading
Investors tend to convince themselves that recent investment performance represents the future. The problem with chasing todays winning stocks or mutual funds is that by the time you hear about the latest hot performers, you may have already missed out on all or most of the opportunity to participate in that price appreciation. Chasing past winners is closely correlated with another potential investment mistake overtrading. Shuffling your investments too often increases the chance you'll buy high and sell low a worst-case scenario for investment success. Overtrading also generates more transaction costs and fees that cut into investment gains. One potential solution: work with a financial advisor. An experienced professional may be able to help you stay focused on your goals and avoid the urge to trade frequently. In fact, studies have found that investors who work with a financial advisor tend to hold on to their investments longer and realize better returns than do-it-yourselfers.
Mistake #3: Failing to keep your balance
You might be surprised to find that strong or weak returns in one area have caused a shift in your overall investment strategy that could affect your ability to reach goals or manage risk. Work with your financial advisor to review your asset allocation once or twice a year to make sure that it remains in line with your investment objectives.
Of course, investment mistakes do happen, but many are avoidable. Learn from the missteps of others, start applying these lessons to your investment strategy and make a point of working with a qualified professional.
Leveraging Your Investments
One of the best vehicles for your money is real estate. In St. Louis, we are experiencing an average return of 9 - 12%. Because there was not the fast and explosive growth that other cities experienced, the correction that the market is undergoing currently will not be nearly as volatile and will provide a much safer investment for home buyers. St. Louis real estate can also be much more affordable that in other parts of the country because it enjoys a relatively low cost of living. Many of the residents who have relocated to St. Louis have done so because of the affordability factor. Because of this, St. Louis is poised to enjoy a steady and comfortable growth over the next 20 years.Then the question remains - what to look for and how to know what to purchase. That is where you will need the experience of a proven real estate professional who knows the market, can demonstrate to you a proven track record of success. The real estate process can seem complex and daunting but working with an experienced agent can make all the difference. Currently in St. Louis, the downtown neighborhoods are turning over and experiencing a strong urban renewal. Neighborhoods to watch include Benton Park, Tower Grove East, Dog Town, Soulard, The Hill, and Old North St. Louis.