Want to know why investment plans fail? Below are ten reasons why investors are unsuccessful, in “David Letterman style” from number 10 to number 1, with the last being the most important:
10. Performance of the Investment Portfolio- Ideally, an investor’s portfolio should include a variety of investment products with low expenses that, when averaged together, have a return that exceeds what taxes and inflation are eating away. Otherwise, investments will lose purchasing power over time. Market indices, such as the Standard & Poor’s 500 for U.S. large company stocks and the EAFE index for international stocks, can be used as a benchmark of investment performance.
9. No Check-Up or Investment Follow-Up- Annual investment performance reviews are essential to determine if financial goals are on track and, if not, to determine what adjustments are needed. This is especially the case in 2009 as many investors have suffered large losses and need to reassess their financial plans. Investors often leave their financial advisors when there is no follow-up contact.
8. Too Many Eggs in One Basket or Too Many Baskets- Some investors have too much money in one investment (e.g., employer stock) while others have too many investments, which results in increased record-keeping. A case in point is IRA accounts. Some investors have IRA accounts with several financial institutions. Consolidating IRA accounts can save money on annual custodial fees (i.e., fees charged by investment firms to cover the cost of reporting IRA account balances to the IRS), reduce investment paperwork, and simplify required minimum withdrawals after age 70 1/2.
7. Unrealistic Expectations- Investors cannot expect the double-digit returns on U.S. stocks that were last seen during the late 1990s. According to historical investment research, the long-term average return on stocks is closer to 9 to 10 percent. In addition, history has shown that stock markets can sometimes stay within a relatively narrow trading range, with little or no advancement, for a decade or longer.
6. Lack of Discipline and Impatience- The way to make money in stocks is to “buy low and sell high.” Unfortunately, many investors do just the reverse and convert paper losses to real losses during market downturns. Investors need to assess their “true risk tolerance” so this doesn’t happen. Think you’re an aggressive investor? Ask yourself if you’re okay with losing $50,000 of a $100,000 portfolio in six months.
5. Not Having a Financial Advisor or Not Listening to Advisors- Financial advisors can help keep investors “grounded” during bear markets and focused on future financial goals. Even in severe bear markets, investors may not necessarily be “down” if their investment time frame is 10 or more years away. If you decide to be your own financial advisor, it is essential to understand the history of stock market performance and the various risks associated with investing (e.g., market risk and inflation risk).
4. Not Understanding Investment Portfolio- Many investors don’t understand the investment products that they own. Perhaps they bought investments on the advice of others, or inherited securities, or simply divided their money among investments available in their retirement savings plan. If you can’t explain your investments simply to another person, it probably means that you don’t understand them yourself.
3. Investing Without a Plan- Investors need written goals so they can match the time frame for their goal with suitable investments. For example, short-term goals less than three years away need to be kept in cash equivalent assets (e.g., certificates of deposit and money market funds) while long-term goals more than 10 years out can benefit from the historically higher long-term performance of stocks and/or stock mutual funds.
2. Lack of Emergency Reserve Accounts- Investors need an emergency reserve of at least three to six months expenses so they won’t have to sell stock at a loss during a bear market to meet living expenses.
1. Lack of a Budget- Even though the recession has prompted many people to save more and spend less, others are not living below their means. A budget (also known as a spending plan) is essential to “find” the money needed to invest. Better still, successful investors automate their budgeted investments by following the “paying yourself first” philosophy with automatic payroll deductions and investment deposits.
