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Mistakes investors make more damaging than market swings

POSTED: October 28, 2008 5:00 a.m.

Being at the whim of the financial markets is never easy.  Six months ago, your portfolio maybe was sailing smoothly along, but today; it may feel like it is under water. Although there is no way to control what the markets are going to do, you can take steps to protect your portfolio against investing mistakes that can undermine performance and rob you of healthy returns. The most important day in the life of your portfolio is the day you cash it in, because ever other day is just another day in the market.

How much caution is too much?

Have you heard the one about the investor who refused to put any money into stocks? Inflation robbed him of most of his gains. Over the long term, stocks offer you the best chance for earning inflation-beating returns.

While past performance is no guarantee of future performance, choosing a diversified mix that includes stocks or stock mutual funds* in your portfolio may give you the best opportunity for potential growth.

* Mutual funds are sold by prospectus, which includes information on charges, expenses and risks. To receive a current prospectus, contact your registered representative. Please read the prospectus carefully before you invest or send money.

Many eggs, many baskets
Failing to invest in securities that offer the potential to outpace inflation is not the only threat to your portfolio. Investing in only a few companies or in a single market sector exposes your portfolio to another kind of risk: the risk that your investments could lose value, leaving you without gains from other investments to cushion your losses.

Diversifying your portfolio with a mix of large-cap, small-cap, and other stocks, along with bonds and cash investments, can help you manage your risk. That way, if one sector of the economy or one investment class is not performing well, your other investments may pick up the slack. I have a client that began putting money in his company offered 401k 20 years ago.  Back then there was a lot less information than today, so he simply put a little in each mutual fund that was offered and 20 years later the account had grow beyond this man’s wildest dream.

Think long term
No one is saying you should never sell an investment. But trading investments frequently can lower your returns. In addition to paying trading costs when you buy or sell, you’ll pay taxes on your gains at your regular income-tax rate, which could be as high as 35 percent, on any investments you’ve held for one year or less. Gains on investments held longer than one year are taxed at more favorable long-term capital gains rates.

Don’t overreact
When the market nosedives, it’s hard not to think you’d be better off putting all your money in a tidy little savings account at your neighborhood bank. Typically, though, a savings account will not give you earnings that stay ahead of inflation. Taking your money out of the stock market, even for a short period of time, may prevent you from reaping the rewards of a market rally. By not being invested when the market begins a recovery, you could lose out on potentially significant gains.

Mark Czachowski represents the Czachowski Insurance Agency in Springfield.

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