Three Common Mistakes Investors Make

You don’t have enough diversification in your holdings.

Since recent market swings have been so extreme, it is more important than ever for investors to diversify their investments.

You’re not investing during downturns.

When you see red numbers in your portfolio, you may have been tempted to slow down your investments until things calm down. The host of Women & Money (and Everyone Smart Enough to Listen), Suze Orman, says that avoiding a declining market is a huge mistake if you are a young investor. According to her, you want the stock market to go down. Putting money into something that is already really high doesn’t make sense if you’re 35 years old.

Investments can seem risky when markets are declining. When you continue to buy stocks when they go on sale, you can get rewarded in the long run by investing a set amount of money consistently – a technique known as dollar-cost averaging.

This strategy can be easily implemented by asking your employer to divert a portion of your paycheck to a workplace retirement account (401(k). Despite falling markets, it’s unwise to ignore the benefits of such plans, which offer matching contributions to employers.

You’re not taking advantage of a Roth.

The two major retirement savings accounts are traditional 401(k)s and Roth IRAs. Contributions to traditional accounts offer an upfront tax break – the money you contribute can be deducted from your taxable income. You’ll be taxed when you withdraw money from the account in return for the break, and you’ll owe tax plus a 10% penalty if you take the money out before age 59 ½.

The reverse is true for Roth accounts. With these accounts, you fund them with money you’ve already paid taxes on, but you reap the tax benefits later on. If you hold the account for at least five years, you will be able to withdraw money tax-free once you turn 59 ½.

Moreover, contributory Roth accounts allow you to withdraw up to the amount you’ve contributed at any time without incurring taxes or penalties, regardless of your age.

It depends on your financial situation whether you would be wise to invest using one or the other. But for young investors, the choice is more obvious; Roth IRA. Orman notes that if you’re early in your career, odds are you’re not in a high tax bracket. Regardless, you’re better off paying taxes today and accumulating, tax-free, for you and your beneficiaries if you follow the rules. In addition, you may avoid some of the problems associated with bringing in taxable income in retirement. Traditional IRAs require required minimum distributions, says Orman. When you die, and your beneficiaries inherit the account, they may be in a higher tax bracket and have to pay taxes when they withdraw the money.