3 Investing Mistakes You Should Avoid At All Costs | Smart Change: Personal Finance
If you are an investor who has made an investment mistake, you are not alone. Even the Oracle of Omaha himself, Warren Buffett, made purchases that he somehow regretted. In an effort to generate extra income, a retirement account, send our kids to college, or perhaps finance a vacation home, nearly all investors have one thing in common – they want to make more money than the paycheck brings in.
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But sometimes what drives us toward financial success can steer us off course. I’ve highlighted three potential investment mistakes that should be avoided to help keep investors on the right track, build stronger returns while improving efficiency – spending less time and money to achieve more.
1. Underestimating the Positives of a 401(k)
When people use their 401(k) to invest in retirement, they pay no taxes on the money they contribute in the year in which they make those contributions. This is a huge benefit – but it may not be the biggest benefit. Even better, many employers who offer a 401(k) to their employees will provide matching funds when you contribute to your account — up to a point. The average matching fund cap is 3.5% of your annual salary. But some investors make the mistake of not taking full advantage of employer contribution matching, especially if their company’s matching threshold is above average.
According to a National Wage Survey from the Bureau of Labor Statistics, 56% of employers offer a 401(k) plan. Among them, 49% do not provide any matching funds. Among employers that do, 41% make an annual 401(k) contribution rate of 6% of gross wages. But 10% of all employers give a match of 6% or more. Therefore, if you work for a company with an identical shareholding, you should at least contribute enough to get the maximum match with your employer.
So for those looking for a new job, the way a potential employer handles their 401(k) plan can be an important factor to consider. for reference , Southwest Airlines Offers up to 9.3%, while Duke University offers 13.2% of faculty and staff members who earn between $72,000 and $305,000, regardless of what the employee contributes. So, if your employer matches 6% and you’re only contributing 1% of your salary, it’s worth increasing your contribution.
One caveat is that once you put the money into your 401(k), it isn’t supposed to be withdrawn until you’re at least 59½, at which time it will be taxed. And if you withdraw it early, you will receive an additional 10% tax.
2. Spend profits on business too late
Dividend stocks offer another way to allow someone else to make more money for you. Of course, you need to invest in order to own shares in stocks. But once you do, you’ll start receiving regular payments that can help cover your bills. Or you can reinvest those profits to increase the number of shares you own. But some investors fail to realize the important role dividends can play in building a long-term portfolio.
for example, coca cola (NYSE: KO) It is one of the elite dividend kings, with a record of increasing its annual dividend for 60 consecutive years. According to today’s stock prices, its current annual dividend of $1.76 is about 2.7%.
Investing $10,000 in Coca-Cola shares will save you approximately 154 shares as of this writing. That’s $271 a year in passive income, or the equivalent of four additional shares if you reinvest those payments. Do that over 30 years with an average 3.7% annual dividend growth rate, plus an average stock price gain of 6.5% — based on the last 10 years, going back to the last stock split — and the result would be a total of about $19,000 in income. Dividends by 2052.
There are many companies offering dividends, and many of them have higher returns than Coca-Cola. It’s also fair to say that the younger an investor is, the more risk he can take on stocks that may have greater potential for no-dividend stock price growth. But this is just one example where using dividend stocks early in life can help generate passive income while protecting the investor from the uncertainties that come with market volatility and a strong investment portfolio.
3. Being distracted by the shiny thing
This may be one of the most difficult mistakes to overcome. Loyal investors spend a fair amount of time and money accumulating what they believe are strong portfolios. They will make changes to their holdings as new recommendations emerge, or when news and earnings reports require them to amend their investment thesis.
But sometimes, the hype can suddenly start to boil over a new company, product, or market — think cryptocurrencies, the cannabis sector, or meme stocks. These shiny things can distract investors, and hang in front of them the exciting possibility of becoming a millionaire overnight.
This doesn’t mean that cryptocurrency or legal marijuana won’t pay off for investors in the long run – these were just examples. But when the hype wears off, if bold expectations don’t come true, it’s easy to find yourself sitting on a dwindling or worthless investment. In the meantime, if you sell shares from your portfolio to fund this new investment, you may also lose the earnings of the most reliable companies.
This is where the risk/reward has to be carefully evaluated. Being distracted by the shiny body can be rewarding if you get in early, and if taken off – two big “ifs”. But when you have an existing portfolio, approaching retirement age or sending a child to college, you need to protect that investment from volatility risks. This is the time not to be distracted by the shiny thing.
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Jeff Little holds positions at The Coca-Cola Company. Motley Fool recommends Southwest Airlines. Motley Fool has a disclosure policy.