How to Avoid These Personal Investing & Financial Gaffes

investing; stock market; economy; mutual funds; 401K; credit; default swaps; hedge funds; leveraged buyouts; short selling; derivatives

"Never write a book about mistakes," an editor at a major publishing house once advised me. "People want to read about how to make money, not how to avoid losing money."

The depth of this recession, however, makes capital preservation every bit as important as positioning yourself to make money as the economy improves.

Investors typically make mistakes during this murky "in-between" economic period.

"It is a major mistake in this recovery story to assume a stock is undervalued, since many companies trading at historic lows deserve to be," warned Wayne Thorp, certified financial analyst with the Chicago-based American Association of Individual Investors (www.aaii.com).

"For example, when you see a seemingly good bank's stock trading for a few dollars, remember that price indicates what investors consider that company's future value to be."

With sale prices of stocks such a tricky business, Thorp believes you must still do your research and due diligence to identify strong companies with good long-term prospects trading at a discount.

Other financial mistakes to avoid:

Chasing individual industries that have rallied

"Don't constantly chase whatever industry has rallied, because you'll only be catching the tail end of that rally," said Angela Thomson, certified financial planner at Coastal Financial Planning Inc. in Lincoln, R.I. "And just because an industry is rallying doesn't mean it is right for you."

Thomson is wary of technology and communication sectors because both have had strong rallies, but she says small-cap growth stocks still have a way to go before gains subside.

Locking in long-term rates in an uncertain economy

"We've seen this movie before: interest rates at record lows with inflation running next-to-nothing, so it is no stretch of imagination to see them higher at some point," said Greg McBride, senior financial analyst at Bankrate.com in North Palm Beach, Fla. "I'm not forecasting inflation like the early 1980s, but if it jumped to 4 or 5 percent, it is a big deal, and you wouldn't want to be locked into 3 percent certificates of deposit."

Settling for 2 percent to 2.5 percent interest on a one-year CD rather than 3.5 percent on a five-year CD is a better course in this scenario, McBride said. It allows the flexibility to reinvest in the future at a higher rate of return. A loss of buying power is just as damaging as a loss of principal, he said.

Getting bogged down in "cosmic" economic worries

"Making investment decisions based on this week's housing starts or consumer sentiment is a mistake," said Thorp, noting that it took Washington officials more than a year to even acknowledge the nation was in recession. "And while financial TV channels can help you gauge the winds of the market, paying too close attention can simply be troubling."

Even solid advice can be misconstrued or prove inappropriate for your circumstances.

"People get too caught up in listening to pundits rather than their own financial advisors who know them, their financial situation and their risk tolerance," said Thomson. "They listen to information about the broad market and broad economy, not their own situation that should guide their investing."

Halting retirement investing altogether

"It is a big mistake to forsake retirement savings in this environment, because if you don't do it this year, you'll never get the chance to go back and make those retirement contributions again," said McBride, who acknowledges that some employers have made investing less attractive by cutting back or eliminating company matches on 401(k) retirement plans.

Because their 401(k) values have gone down dramatically, many workers "throw up their hands" and stop their deductions, he said, but in the long run that will significantly curtail their future retirement savings.

Jumping in or out of the stock market all at once

"I've seen people pull all their money out of the market when it was falling and then put all their money in at one time," Thomson said. "All they accomplished was missing the rally while they were out of the market."

This isn't Las Vegas, after all, where all-or-nothing is accepted as a viable strategy.

"Invest slowly," counseled Thorp. "Dollar-cost averaging (investing a set amount on a regular basis) is the smart way to go because consistency through regular payments is the best long-term course."

Thomson is urging her clients to hold cash positions so they can make careful investments. She currently favors stock in Amgen Inc. (AMGN), because it has a solid pipeline of drugs, and ConocoPhillips (COP), because it is at the low end of its trading range with plenty of upside potential. In mutual funds she likes convertible bonds, with Fidelity Convertible Securities Fund (FCVSX) an example.

Failing to make the right mortgage moves

"One of the biggest mistakes is yet to come: sitting in an adjustable-rate mortgage at a time when interest rates will inevitably rise," said McBride. "Fixed rates are near historic lows, so you should try to take advantage now."

Many homeowners don't have enough equity in their homes to refinance or are unable to refinance because they're unemployed and can't obtain a loan, McBride said. But if you do have the ability to move out of an adjustable-rate loan, you should definitely do it now, he said.

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Avoid These Personal Investing & Financial Gaffes