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Monday, July 26, 2010

Investment Portfolio Mistakes to Avoid

Are you a truly expert investor as you really believe?

Do you consider yourself as a well-informed investor who is capable of anticipating and avoiding the majority of the risks that are usually associated with investing?

Chances are, you are making many common errors that are costing you a lot of money and may even harm your financial independence and security.

Below you can find the two most costly errors investors make with their investment portfolios:

1. Asset Classes and Subclasses

How you allocate your portfolio, rather than which investments you select or when you buy or sell them, determines the majority of your investment performance over time.

The solution is to allocate your portfolio to many asset classes and subclasses and be careful not to over or under weight any asset class.

Do not mistakenly believe that a properly diversified portfolio is a properly allocated portfolio. Properly allocate your portfolio among the different asset classes first and then diversify the investments within each asset class.

Diversification is the cornerstone of asset allocation and is key to reducing risk, namely company-specific risk. To properly diversify, you should hold sufficient quantities of not-too-similar securities with comparable risk and return trade-off profiles.

2. Inflation

Inflation can destroy the real value of your portfolio over time, thus placing your future financial security at risk.

As a general rule, the longer your investment time horizon, the more you should allocate to equity investments. For shorter investment time horizons, emphasize fixed-income and cash and equivalent investments.

By avoiding these two mistakes, besides other investing mistakes, you will be able to design an investment portfolio that will provide the best opportunity to achieve and protect your financial independence and security.