How to Invest






4 More Investing Mistakes to Avoid

Wealth Building Tips to Help Your Portfolio Grow

The key to building wealth lies not in making brilliant allocation decisions, but rather in avoiding large mistakes. These four additional investing mistakes are among the most common committed every day. This article is a sequel to Four Investing Mistakes to Avoid: Becoming Your Portfolio's Worst Enemy.

1. Overpaying for Investments
The price you pay for an investment is the absolute determinant of your return. An investor should never ask, “is company XYZ a good investment”. Instead, he should ask, “is company XYZ a good investment at this price .

2. Overpaying for Investment Services
Unless there is a legitimate reason you require a full-service broker, you should opt for a significantly less expensive discount broker such as Charles Schwab, E-Trade, Ameritrade or Brown & Co.

3. Extrapolating Current-Year Earnings into Future Periods to Determine Value
Benjamin Graham warned that the hindrance to successful investing did not lie so much in overpaying for good companies (which is a very real performance-damper nonetheless), but rather in overpaying for mediocre companies based on current year earnings that may be the result of a booming economy or a cyclical upswing. To guard against this pit fall, he recommended using average earnings.

4. Discounting Index Funds
Only a small, minute percentage of professional money managers have been able to beat the S&P 500 or the Dow Jones Industrial Average consistently over the course of many, many years. Despite relatively high compensation, extremely bright individuals and rooms full of math whizzes performing market analysis, the “dumb”, unmanaged portfolios of the S&P and Dow manage to trounce the competition nearly every time.

Investors who are privy to this information and have no ambition to become a master at security or financial statement analysis would be well served to set up a dollar-cost averaging plan into a low-cost index fund such as Vanguard over the span of a decade or more. Judging by past statistical evidence, this investor will most likely trounce a significant majority of his competitors. Wealth building aside, the index investor is also free to ignore short-term market gyrations, portfolio reallocations and individual investing decisions freeing up a significant amount of time for the things that really matter.

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