7 mistakes you don't want to make

June 1, 2007

Many investors and savers prefer to make their own investment decisions. However, unless you are well-informed and have clear goals, those investment decisions could do more harm than good.

Key Points

When it comes to managing money, many savers and investors prefer to make their own decisions.

I'm one of those people, and you may be, too. While steering your own course can point you toward financial success, it also puts you at risk for drifting into troubled waters.

Here are seven money mistakes that you want to avoid:

Please read the above line again.

It describes what may be the most costly mistake you can make in your financial life. If you are to accumulate significant wealth, you must come to understand the importance of paying yourself first.

If you have ever said, "After I pay all my bills, there is nothing left to save," you are in dire need of emergency treatment. Successful money managers understand the losing psychology of "back-door savings." That is, putting savings aside only after you have taken care of all other needs. That philosophy almost guarantees that there will never be anything left to save.

So, always pay yourself first.

Decide now how much money you intend to save each month and put that money aside first. What is left is what is available for you to live on.

Failing to account for inflation

The ultimate goal of most investors is to provide for a secure retirement.

That time may be many years away for you, or just around the corner. Either way, inflation will play a major role in your retirement years. That's why your long-term savings goals must allow for the effects of inflation.

Here's an example of how inflation affects your life: If you paid $60 for a week's groceries in 1987, you're paying about $105.97 for those same items today. Imagine what that bill will look like 20 years from now.

If you'd like an easy way to gauge inflation's effects on some of your personal expenses, log on to http:// http://www.westegg.com/inflation/. This easy-to-use inflation calculator adjusts any given amount of money for inflation, according to the Consumer Price Index, from 1800 to 2005.

Failing to tailor asset allocation

Dividing the assets in your investment portfolio among equities, bonds and cash equivalents is a critically important factor in your financial future.

The best asset allocation plan for you will depend on such variables as your age, your tolerance for risk and your personal financial circumstances. For an excellent guide to asset allocation by the U.S. Securities and Exchange Commission, log on to:

http://www.sec.gov/investor/pubs/assetallocation.htm.

Failing to rebalance asset allocation

Once you create an asset allocation plan, it's important to adjust it at least once a year.

As time passes, some of your investments will probably grow faster than others, throwing your balance out of whack. Rebalancing is necessary to bring your overall investment plan back into line with your objectives.

Trying to time the market

Investors who believe in market timing try to predict future price movements through use of charts and analyses based on past performance and other factors.

The problem is that it doesn't work.

As much as some would like to believe it, stock prices seldom move for logical or predictable reasons. The marketplace is a psychological arena. Any unexpected event can send a stock's price soaring, or crashing to the depths. It all depends on the moods of those who buy and sell. It's folly to think that a chart can help you to predict human behavior.