Avoid these 6 common mistakes investors make

May 25, 2021

Certain approaches to investing could impact your overall financial plan.

 

Are you investing too cautiously or avoiding debt even when it could help you reach your financial goals? Sometimes even savvy investors make investing mistakes — but if you're aware of the common pitfalls, you may be able to dodge them and invest more confidently.

 

1.  Investing too conservatively


You may already know that investing in too many risky assets can potentially leave you exposed to major losses. It may not be as obvious that investing too conservatively can also carry risks. 

If retirement isn’t on the horizon, consider having a larger percentage of your investments in equities (commonly known as stocks). The potential returns may be higher, and you’ll have more time to potentially make up any losses when markets are volatile.

As you get closer to retirement, consider shifting your portfolio toward more conservative assets. A financial professional can help you determine the best investment mix for your situation.

 

2.  Not using debt advantageously


For many, the default strategy is to avoid debt or pay it off as quickly as possible. This is a good approach for certain kinds of debt, such as credit card debt. In other cases, strategically managing debt may be to your benefit.

Taking out a student loan for an advanced degree, for example, might help you complete the education and training needed for a higher-paying job in the future. If you’re a business owner, a small business loan may help you expand your organization. If you have life insurance to help offset estate tax liability, financing to cover the premium may help keep your current cash flow intact and keep you from having to liquidate assets.

The key is to understand when you can use debt strategically and responsibly to work towards your overall goals and objectives.

 

3.  Failing to capitalize on tax breaks


Investors commonly fail to claim tax breaks that may save them a substantial amount of money.

Depending on income levels, contributions to traditional IRA accounts can be tax-deductible, which may be a simple way to reduce your taxable income. You may also consider selling assets that have declined in value and deduct your investment losses, potentially offsetting capital gains realized in other areas.

With the Tax Cuts and Jobs Act, many types of expenses that had been deductible no longer qualify, while the standard deduction for households has increased. You should speak with your tax advisor to help ensure you’re taking advantage of all of the tax breaks and tax strategies you’re entitled to.

 

4.  Overpaying for mutual fund fees


While it’s fundamental to understand the returns on your investments, it’s also important to keep track of your fees. Mutual funds and exchange-traded funds (ETFs) have an expense ratio, or percentage charged in management fees and operating costs, that will reduce the value of those investments. If the expense ratio on certain funds appears out of line with competitors’ expenses, it may make sense to research alternatives with lower fees. Some mutual funds also have a load, which is a sales charge or commission.

These fees and charges have the potential to take a bite out of your overall returns, so keep track of them, look for the difference between net and gross returns or losses and know when to seek alternatives.

 

5.  Forgetting to rebalance your investment portfolio


Within a diversified and risk managed portfolio, some investments will outperform over the course of a year, while others will underperform.

As part of a disciplined investment strategy, consider periodically rebalancing to bring your portfolio back into line with your target allocations and risk tolerance. Not doing so may result in taking on more risk than you had intended. For example, if you don’t rebalance after large market gains, you may be overbalanced­ in stocks, which may not be the right fit for your circumstances.

Some investors rebalance their portfolios at the same time once or twice a year. Others prefer to set a limit on how far an asset class can diverge from its target percentage of their portfolio. Whatever your approach, there are many things to consider when rebalancing your portfolio so work closely with a financial professional.

 

6.  Owning too much of your employer’s stock


If your company fulfills its 401(k) match with shares of its publicly traded stock instead of with cash, or if much of your compensation comes from company stock options or awards, a lack of diversification may expose your investment to too much risk. Considering that your salary, health insurance and possibly a pension may be tied to the fortunes of your company, your financial wellbeing could be in jeopardy if it fails or your industry suffers a major setback.

If you exercise stock options or receive stock awards that vest, a financial professional can help you develop a plan that reflects your level of risk. If your portfolio is over balanced in this area, you may establish a plan to regularly sell shares so you don’t become overly invested in yours or any single company. A general guideline is that no more than 5 to 20% of your investment portfolio should be in one company’s stock.1 Keep in mind that selling company shares may have tax implications unless the shares are inside your 401(k) or other qualified plan. Consider consulting an accountant as you develop your strategy.

Another option if you're 59½ or older, leave your job, or become disabled, and have highly appreciated company stock in your 401(k), is to take advantage of Net Unrealized Appreciation (NUA) tax treatment. NUA allows you to take a lump-sum distribution of company stock from a 401(k) and move it directly to a non-qualified account (without selling the stock) to minimize taxes. The fair market value of the shares at the time of purchase (cost basis) is taxed as ordinary income when distributed this way, but taxes on the net unrealized appreciation (all gains above the cost basis) of the distributed shares are deferred until the shares are sold.  At that time, the gain is taxed at the typically more favorable capital gains tax rate.  Any loss will be considered a capital loss.

 

One of the most important considerations for investors is how to manage risk. Read about 7 diversification strategies for your investment portfolio.

Related content

Investment strategies by age

Investing for beginners

Bull and bear markets: What do they mean for you?

Retirement expectations quiz

A guide to tax diversification in investing

7 diversification strategies for your investment portfolio

6 year-end tax planning tips

How to use debt to build wealth

How to manage your money: 6 steps to take

Good debt vs. bad debt: Know the difference

6 common money mistakes to avoid

Avoid these 6 common mistakes investors make

5 times you may need a financial advisor

4 strategies for coping with market volatility

5 questions to help you determine your investment risk tolerance

Key components of a financial plan

5 financial goals for the new year

4 tips to help you save for retirement in your 20s

4 times to consider rebalancing your portfolio

4 major asset classes explained

What are alternative investments?

Evaluating interest rate risk creating risk management strategy

5 myths about emergency funds

What’s your financial IQ? Game-night edition

6 pandemic money habits keep for long term

How having savings gives you peace of mind

Tips to overcome three common savings hurdles

Things to know about the Servicemembers Civil Relief Act

5 tips to use your credit card wisely and steer clear of debt

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

How you can take advantage of low mortgage rates

4 questions to ask before you buy an investment property

How to talk to your lender about debt

Everything you need to know about consolidating debts

7 steps to keep your personal and business finances separate

Know your debt-to-income ratio

How to use your unexpected windfall to reach financial goals

U.S. Bank asks: What do you know about credit?

How to build and maintain a solid credit history and score

How to improve your credit score

5 tips to use your credit card wisely and steer clear of debt

Luxembourg's thriving private debt market

Employee benefit plan management: Trustee vs. custodian

Renewing your custody contracts? Negotiate the fees.

The reciprocal benefits of a custodial partnership: A case study

Private equity and the full-service administrator

Capitalizing on growth in the private equity space

Programme debt Q&A: U.S. issuers entering the European market

How liquid asset secured financing helps with cash flow

Top 3 considerations when selecting an IPA partner

4 benefits of independent loan agents

How to maximise your infrastructure finance project

Cayman Islands’ Private Funds Law: What you need to know

Consolidating debts: Pros and cons to keep in mind

Rule 18f-4: An in-depth look at the derivative risk management program and value-at-risk

Rule 18f-4: The limited use exception

Rule 18f-4 overview: Regulatory framework changes for derivatives

Can you take advantage of the dead equity in your home?

Investing in capital expenditures: What to discuss with key partners

Interval funds find growing popularity

MSTs: An efficient and cost-effective solution for operating a mutual fund

ESG-focused investing: A closer look at the disclosure regulation

4 questions you should ask about your custodian

OCIO: An expanding trend in the investment industry

At your service: Outsourcing loan agency work

Maximizing your infrastructure finance project with a full suite trustee and agent

The unsung heroes of exchange-traded funds

3 questions to ask your equity, quant and CTA fund administrator

A first look at the new fund of funds rule

1“Workers with company stock might have too much risk in their investment portfolio,” CNBC. 
Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.
Start of disclosure content

Investment and insurance products and services including annuities are:
Not a deposit ● Not FDIC insured ● May lose value ● Not bank guaranteed ● Not insured by any federal government agency.

U.S. Wealth Management – U.S. Bank | U.S. Bancorp Investments is the marketing logo for U.S. Bank and its affiliate U.S. Bancorp Investments.

The information provided represents the opinion of U.S. Bank and U.S. Bancorp Investments and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank, U.S. Bancorp Investments and their representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

For U.S. Bank:

U.S. Bank does not offer insurance products but may refer you to an affiliated or third party insurance provider.

U.S. Bank is not responsible for and does not guarantee the products, services or performance of U.S. Bancorp Investments, Inc.

For U.S. Bancorp Investments:

Investment and insurance products and services including annuities are available through U.S. Bancorp Investments, the marketing name for U.S. Bancorp Investments, Inc., member FINRA and SIPC, an investment adviser and a brokerage subsidiary of U.S. Bancorp and affiliate of U.S. Bank.

U.S. Bancorp Investments is registered with the Securities and Exchange Commission as both a broker-dealer and an investment adviser. To understand how brokerage and investment advisory services and fees differ, the Client Relationship Summary and Regulation Best Interest Disclosure are available for you to review.

Insurance products are available through various affiliated non-bank insurance agencies, which are U.S. Bancorp subsidiaries. Products may not be available in all states. CA Insurance License #0E24641.

Pursuant to the Securities Exchange Act of 1934, U.S. Bancorp Investments must provide clients with certain financial information. The U.S. Bancorp Investments Statement of Financial Condition is available for you to review, print and download.

The Financial Industry Regulatory Authority (FINRA) Rule 2267 provides for BrokerCheck to allow investors to learn about the professional background, business practices, and conduct of FINRA member firms or their brokers. To request such information, contact FINRA toll-free at 1-800‐289‐9999 or via https://brokercheck.finra.org. An investor brochure describing BrokerCheck is also available through FINRA.

U.S. Bancorp Investments Order Processing Information.