|Focusing your vision, achieving results|
-- Danforth Associates
by Stuart Danforth
1. Holding unrealistic return expectations. Many investors assume that the goal of investing is to simply earn the highest return possible without losing money. Performance-focused investors are not satisfied unless they “beat” the market. The problem with shooting for the highest return possible as the main goal in investing is that it can create unnecessary risks and erratic investing patterns that ultimately undermine your efforts to achieve those life goals that truly matter to you. The bear market of 2000-2002 harshly demonstrated to many exuberant investors that high double-digit returns were not a given.
Wise investors and experienced financial advisors will tell you that a proper investment strategy will help you realize major life goals: a comfortable retirement, a dream job or business, a college education for your children, funding for your favorite charities, or accumulating assets to pass on to your heirs.
2. Taking unnecessary risks. Investors who only seek the highest possible returns are more vulnerable to investment scams offering returns that “are too good to be true.” Much of the riskiest investing, overbuying, and panic selling during the late 1990s and early 2000s would have been avoided if individual investors had created their own investment plan for achieving long-term specific goals such as retirement or a college education. A proper balance between risk and return is critical.
3. Not taking enough risk. Many investors are now afraid to invest at all and some even stopped contributing to their company-sponsored retirement plans. They shifted their entire portfolios to low-yielding savings accounts and have missed many subsequent market gains. Again, they lost sight of the real purpose of investing and have hindered their efforts to achieve long-term financial goals. Taking the right amount of risk is necessary to achieve the returns you need to reach your goals.
4. Failing to diversify. Finally, chasing the hot fund, stock or sector is a mistake that many investors make. Proper diversification and asset allocation are more than simply not putting all of your eggs in one basket. As the saying goes, past performance is no guarantee of future results.
WHAT ALL SUCCESSFUL INVESTORS KNOW
Goal-based investing is the secret that successful investors hold dear to their hearts and their investment accounts. Think of your accounts in the way that one investor does with two of her accounts: One represents her daughter’s college tuition and another is for the party she is going to have when she retires. With this approach, this woman’s investments are translated into goals, specific moments in the future that represent financial success and security. Through the process of aligning lifetime goals with investment strategy, financial advisors and successful investors know that “beating the market” is really a myth.
Define your destination first: then draw the best route for the journey with your financial advisor and align your lifetime goals with your investment strategy. After all, even the finest maps in the world are useless if you don’t know to where you are traveling.
Stuart Danforth of Danforth Associates, a Wellesley, MA based investment advisory firm that has assisted investors with their wealth development goals for over fifty years. http://www.danforthassociates.com
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