Avoid These Common Personal Finance Mistakes
Elliot Raphaelson

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I've made my share of investing mistakes, as have my students, friends and acquaintances. And, from my observation, the well educated and well to do make just as many mistakes as everybody else. The best way to get your financial house in order in 2011 is to be sure you're avoiding these all-too-common mistakes:

Waiting too long to save

When young people enter the workforce for the first time, starting to save for retirement is usually a very low priority. Unfortunately, the vast majority of Americans don't think seriously about retirement until their 50s, or even later. By then, with rare exceptions, it is too late for several reasons. They will not be able to set aside enough savings to live on with the same standard of living. Nor is there any guarantee that, in the short time frame in which they do save, the financial markets will be favorable.

Insufficient diversification

Diversification is key to obtaining optimum returns on investments; unfortunately, most investors pay insufficient attention to its importance. One of the most successful endowment managers in the U.S. is David Swenson, who managed the Yale investment portfolio for several years with outstanding success. I recommend his books highly. He provides several examples of effective diversification, as well as emphasizing the importance of low-cost, tax-efficient "market-mimicking" portfolios, and the use of "not-for-profit" investment companies such as Vanguard and TIAA-CREF. Other excellent authors who support this viewpoint are Burton Malkiel and John Bogle.

Not rebalancing often enough

It's impossible to predict when the stock market will outperform the bond market, and vice-versa. At least once a year, you should re-allocate your portfolio back to the percentages you have determined make sense for you. For example, let's say you're in your 40s and you have adopted the following portfolio mix: 60 percent in common stocks, 30 percent in bonds and 10 percent in a combination of real estate and commodities.

At the end of the year, let's say your portfolio (hopefully in no-load index funds) is 55 percent in common stocks, 33 percent in bonds and 12 percent in real estate and commodities.

Assuming you are comfortable with your initial allocation, you should sell some of the bonds, real estate and commodities, and buy additional common stocks. You'll be taking advantage of market fluctuations by taking some profits in assets that have increased in value and investing more in assets that have fallen in price. Remember, no advisor can always predict short-term market movements. Rebalancing will smooth out your overall market performance.

Hiring The Wrong Advisor

I'm a strong believer that individuals should be their own financial planners, and several years ago I co-wrote a book, "How to Be Your Own Financial Planner," with my daughter, Debra, indicating how to do that. Many authors have also written books with this objective in mind. I recommend excellent recent books written by Andrew Tobias and Jane Bryant Quinn.

Many individuals don't want to do their own planning and prefer an advisor. If you intend to use an advisor, I recommend an experienced fee-only advisor with references you can check. This approach will help you avoid purchasing products and services that will not serve your interests. Many planners who depend on commissions are likely to recommend annuity products that provide high commissions to them but likely non-existent advantages to you. You should also not retain a planner or broker who recommends wrap accounts or managed accounts. These accounts are very expensive -- and you can purchase no-load "lifestyle" mutual funds from a reputable fund family, which will provide equivalent diversification without the high costs.

These are by no means the only mistakes investors make -- I'll be describing more in coming columns. But avoid these and you'll be on your way to greater financial security.

Available at Amazon.com:

Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals

Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire

The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living

Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back