We're celebrating Financial Literacy Month in numeric style. Follow our crash course on maximizing your portfolio and finances with The 10 Essential Money Lessons.
"Learn from the mistakes of others. You can't live long enough to make them all yourself." -- Eleanor Roosevelt.
Some mistakes are more painful than others. As we've seen clearly with the fall of the housing market, one financial mistake can ruin a whole lifetime of scrimping and saving. But, like Mark McGwire, I'm not here to talk about the past … let's focus on the common mistakes you should avoid. We can debate about whether the three I've selected are truly the biggest investing mistakes you can make (I invite you to do so in the comments section below), but these are certainly three investing mistakes you don't want to make.
Don't let poor asset allocation make you poor
Before trying to figure out if the latest hot stock tip is worthy of your investment dollars, you need a plan. How much should you put into stocks? How much into bonds? How much should just be in an emergency fund? Fellow Fool Dayana Yochim explains the basics here.
Remember to be honest with yourself about how risk-tolerant you are. When times are good, it's easy to take too many risks with your portfolio, and vice versa.
Don't invest in anything you don't understand
Buying stock in a company you don't understand is a bad move. It leads to finding the next Enron instead of the next Coca-Cola
If studying individual companies isn't your thing, there is no shame in buying and holding index ETFs or funds. In fact, I believe that's the best strategy for most investors.
But it's more than just individual companies. You may know the definition of exotic options like an Iron Condor or a naked straddle, but it takes a lot more than that to actually buy or sell options. It's the same with preferred shares of stock. Or futures contracts. Or adjustable-rate mortgages, for that matter.
Also, as an aside, don't trust an "expert" just because they use terminology you don't understand. A lot of Wall Street types hide behind nonsensical jargon to inundate, abuse, and enrich (themselves). Ignore them like you would an e-mail entreaty from a Nigerian prince.
If you have no clue what the risk is in the risk-reward balancing act, you're better off putting your money elsewhere. Yeah, it's possible to take an insane risk and make your fortune in a year. It's also possible to win the lottery … but I wouldn't bet my retirement on it.
Never buy on margin
Just don't do it. Using margin (i.e., borrowing money from your broker to buy securities) is a very dangerous game. Not convinced? Just ask Aubrey McClendon, the CEO of Chesapeake Energy
Don't hate … participate!
Here's a bonus tip: don't procrastinate. It's never too late to start taking control of your financial future … but it's never too early, either. Start with a little Foolish education. Read about the power of compounding interest in The 10 Numbers That Rule Your Wallet, browse some great books in Tom Gardner's Top 5 Financial Must-Reads, or explore the rest of Fooldom with 5 Easy Tools for Money Mastery.
Share your investing mistakes in the comments box below.
Share your thoughts about investing mistakes in the comments box below. Or if you're in the mood for more financial know-how, check out the rest of our 10 Essential Money Lessons.
Anand Chokkavelu loves the Fool's wiki … even though it’s a work in progress. He doesn't own shares of any company mentioned. Chesapeake Energy and Coca-Cola are Motley Fool Inside Value picks. Coca-Cola is a Motley Fool Income Investor selection. The Fool has a disclosure policy.