Recs

4

These 3 Mistakes Are Killing Your Recovery

It's never a good time to leave money on the table. But when you're trying your best to recover from the losses you've suffered over the past two years, you need to take advantage of every opportunity you can -- and avoid the errors that will eat into the profits you've fought so hard to regain.

1. Waiting too long to get back in
The stock market has risen more than 60% from its lows of nearly a year ago. Yet few investors took full advantage of that rise, as they waited for more confirmation that the economy and the financial markets would continue to recover rather than dip back down in another market meltdown.

Of course, if you'd wanted to grab all of those profits, you would've needed perfect timing. Even just a few weeks after the early March lows, stocks had rebounded sharply, with the S&P 500 rising from its intraday low of 667 to nearly 800 by the end of the month.

But you didn't need to pick the exact bottom to reap some huge profits from the recovery. Even if you'd waited until the end of April to buy, you still would have seen the S&P jump more than 25% by now. And with some stocks, you had a lot more time to get on board before the profit train left the station:

Stock

Return, March 9 to April 30, 2009

Return Since
April 30, 2009

Apple (Nasdaq: AAPL  )

51.4%

61.6%

Ford Motor (NYSE: F  )

243.7%

89.3%

Caterpillar (NYSE: CAT  )

50.7%

63.7%

Freeport-McMoRan (NYSE: FCX  )

32.0%

78.4%

Capital One (NYSE: COF  )

91.8%

120.9%

priceline.com (Nasdaq: PCLN  )

23.9%

117.5%

Southwest Airlines (NYSE: LUV  )

35.0%

78.7%

Source: Capital IQ, a division of Standard and Poor's.

Sometimes it is prudent to wait until at least some of the dust clears before you invest during uncertain times. But even now, no one's 100% certain about what the future will bring -- and if it brings more prosperity, then you've already missed out on a huge amount of potential gains.

More often, though, it's smarter to take calculated risks coming out of a downturn. Sometimes you'll be wrong and put money in too early. But at least you'll be sure you won't miss out if the recovery comes sooner than you expect.

2. Focusing on fads
No matter how the markets are doing, there are always some areas that attract investor attention. Lately, people have turned to emerging markets as the sole remaining driver of strong growth in the world. In addition, investing in commodities has entered the mainstream as a potential diversifier for your portfolio, especially with exchange-traded funds designed to help you invest easily.

The trap with fad investing isn't necessarily that those investments won't do well. There are plenty of reasons to support both emerging markets and commodities right now, and they could easily extend their big gains well into the future.

But where fad investing does fall short is that it distracts you from other promising investments in less-followed areas. Typically, you'll find the best opportunities away from the popular fads -- and once they deliver strong returns, they in turn become the next fad. So don't ignore down-and-out sectors; they may be tomorrow's top performers, and you can get in on the ground floor.

3. Paying more tax than you have to
Taxes are a constant enemy for the investor. Yet even though you have a number of weapons at your disposal, not all investors take advantage.

With 401(k) plans, traditional and Roth IRAs, and the lower tax rates on dividends and long-term capital gains all at your disposal, you can do a lot to minimize your taxes. But for reasons ranging from procrastination to an unfounded belief that the government will eliminate tax-free treatment for Roth IRAs in the future, some choose never to use them.

That's a mistake that will come back to haunt you. Over a lifetime, tax deferral can add hundreds of thousands of dollars to your portfolio value. Tax-free treatment on a Roth can boost your savings even more. Given how easy it is to start an IRA or enroll in a 401(k), there's simply no good excuse for missing out on these tax-saving opportunities.

Get smarter
Everyone makes mistakes. The best investors, though, learn from them and strive not to repeat them. By being aware of where you fall short, you can correct errors and make more money for the rest of your investing career.

Are you choosing the right stocks for your portfolio? Rex Moore has seven ways to tell if you've got a winner.

Fool contributor Dan Caplinger's biggest mistakes have nothing to do with investing. He owns shares of Freeport-McMoRan. Apple, Ford Motor, and priceline.com are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy keeps you from making mistakes.


Read/Post Comments (2) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2010, at 1:59 PM, langco1 wrote:

    forclosures continue to rise as fast as home prices decrease in the last 15 months there are now over 9,000,000 forclosures many homes that were already forclosed on and bought by foolish investors.with the US in its second year of a depression real estate is no where near its eventual lows...

  • Report this Comment On February 17, 2010, at 4:44 PM, langco1 wrote:

    its the growing depression thats the problem not the so called recovery which is nothing more than wishful thinking and getting to be a real bad joke!

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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