5 Fatal Investing Mistakes You Must Avoid

2013 May 7
by Kyle Bumpus
from → Investing And Investments, Personal Finance

Warren Buffett once said the key to successful investing is to avoid making major mistakes. Kinda. He actually said “don’t lose money,” but I think my paraphrase is more useful. You don’t need any big wins as long as you avoid the big, fatal losses. Which is good, since very few people have the skill to score big wins consistently.

Luckily, avoiding fatal losses isn’t overly complicated. In fact, I can think of just 5 fatal mistakes. Avoid those and you’ve got an excellent chance of funding a comfortable retirement.

5 Fatal Investing Mistakes You Must Avoid

1. ) Not saving enough

This is mistake numero uno. If you aren’t saving enough for retirement it almost doesn’t matter what else you do. Chances are if you’re under the age of 40, you won’t have a pension. And while I think claims that Social Security won’t be around in 30 years are mostly BS, there’s a real chance it might be somewhat less generous than it is now.

The old rule-of-thumb is that you should save 10% of your income for retirement. That made sense when pensions were more mainstream, but today’s young worker probably needs to save more like 15% of her income to really guarantee a good shot at a comfortable retirement.

2.) Not taking personal responsibility for your finances

For many, the temptation is strong to throw up their hands and proclaim “I just don’t get this stuff. I’ll let a professional handle it.” There’s nothing wrong with seeking professional help, but blindly trusting somebody else to handle your money is a recipe for disaster. Nobody cares about your finances as much as you do.

The world is full of people who handed off responsibility for their money to some “highly qualified professional” and lost it all. Plenty of celebrities, professional athletes, and lottery winners who made more than enough money to provide for themselves and their children for a hundred years have ended up bankrupt. Why? Because they weren’t paying attention. And when the fit finally hit the shan, what was their excuse? That they trusted somebody else to handle their money and they were betrayed. Screw that. Even if you trust somebody else with your money, it’s still up to you to monitor their actions. Do you think those people who were betrayed by others kept tabs on their advisors? Nope. That’s the opposite of taking personal responsibility for your money. Don’t be that person.

3.) Investing without a plan

Investing without a plan all too often leads to emotional decision-making. If you have a well thought-out plan, you’re more likely to stay the course when the market hits a rough patch. My advice: come up with a reasonable asset allocation according to your willingness and ability to take risk and write it down along with your reasoning for choosing that particular allocation. Whenever you feel panicky, read back to yourself what you wrote. Often, that will be enough to convince you to stay the course.

4.) Neglecting to educate yourself about  money

This is an absolute necessity. Even if you decide to invest with a competent financial advisor, you need to know the basics of investing. How would you ever be able to figure out which advisors were competent and which weren’t if you didn’t?

5.) Getting too cocky

Everybody thinks they’re a genius in a bull market. How many ordinary, everyday people turned day traders thought they were stockmarket geniuses during the late 90′s when tech stocks were setting new records daily? Tons. How many still thought they were geniuses a few years later after the crash? Almost none. Don’t buy into your own hype. Everybody looks good in a bull market.

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5 Responses
  1. 2013 May 7

    Yup. It’s not how much you make but how much you save.

    I’d add a #6 — not starting early. There are so many advantages for real young folks when it comes to investing for retirement.

  2. 2013 May 7
    Lou Hegwer permalink

    I want to take responsibility for my finances but I am nervous. How do I come up with a reasonable asset allocation?
    Investing in Vanguard, or anything on line, I wonder will my account be hacked? what can I do to prevent that?
    Nervous Nelly in Montana

  3. 2013 May 9

    That is right. Because even though you are earning a lot if you don’t know how to save, you retirement is not guaranteed. If you save even just a little but consistent, than that would make a lot of difference.

  4. 2013 June 3

    Completely agree with you! It is not at all overly complicated. Yet those mistakes are easy to make because they are often made as a result of impulsive judgement and lack of vision.

  5. 2013 November 24

    I have to emphasize #4. Its only when we educate ourselves about money that we can really take advantage of opportunities that exist to grow our money. I think its Robert Kiyosaki who really stresses this in many of his books, financial literacy is key to any plan on escaping the rat race
    Secondly, might I add a #7, start investing as early as practically possible. This way you will enjoy the benefits of compound interest on your investments.

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