It is no treat to be tricked by scary investment moves

Published 12:00 am Sunday, October 3, 2010

If you have young children, or even if you just have some in your neighborhood, you know they will soon acquire large amounts of free candy, obtained by impersonating witches, vampires and other scary creatures. As an adult, of course, you’re unlikely to encounter too many monsters after Halloween ends. Yet as you go through life, you will find some things that are truly alarming — such as scary investment moves.

Here are a few of these frightful actions:

4 Investing too conservatively.

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You could try to avoid investment risk by putting all your money into very conservative investments. However, as you’re probably aware, those investments typically pay very little in the way of interest, so your money could actually lose purchasing power, even with a mild rate of inflation.

4 Investing too aggressively — Just as investing too conservatively can be counterproductive, so can investing too aggressively. Obviously, you would like your money to grow, but the investments with the highest growth potential are usually also those that carry the greatest risk to your principal.

4 Putting too much money in too few investments.

If you put too many of your investment dollars into just one or two types of assets, and a downturn hits those assets, your portfolio will probably take a big hit.

4 Waiting too long to invest — As an investor, your biggest asset may be time. The more years in which you have to invest, the greater the likelihood that you can make progress toward your important financial goals.

4 Taking a “timeout” from investing.

During periods of significant market volatility, such as we’ve seen the past few years, you might be tempted to take a “timeout” from investing and stick all your money into very conservative vehicles until everything “blows over.” But the financial markets will never be totally calm, nor will they be predictable. Market rallies can start unexpectedly; if you’re not invested when that happens, you may miss out on growth opportunities.

4 Ignoring tax-advantaged investment opportunities.

When you invest in a tax-deferred investment account, such as your 401(k) and a traditional IRA, your money has the opportunity to grow faster than it would if it were placed in an investment on which you paid taxes every year. If you aren’t contributing to your 401(k) and you haven’t opened an IRA, you’re missing out on a great chance to build resources for retirement.

To make sure you don’t fall victim to these scary investment moves, you need only follow a few simple principles. First, take the long view — you will see ups and downs in the short term, but historically the market has performed well over the long term. (Keep in mind, though, that past performance is not guarantee of what will happen in the future.)

Second, diversify your holdings among a variety of investments. Diversification, by itself, cannot guarantee a profit or protect against loss, but it can help reduce the effects of volatility. Try to build a diversified portfolio based on your risk tolerance, time horizon and long-term goals. And finally, consider boosting your 401(k) contributions whenever your salary increases and fully funding your IRA each year.

Halloween comes but once a year, but scary investment moves can haunt you for a lifetime — so take the right steps to help avoid them.