by Archie M. Richards, Jr.
July 23, 2007

Here are ten mistakes commonly made by investors:

1. Failing to invest regularly: How much you add to your investments is more important than the rate of return. As you earn the money, get it working. Make your monthly investments automatic. Before you have a chance to spend the money, the financial institution obtains it electronically from your employer or bank account. After 25 years or so, the results of compounding are truly magical.

2. Believing that tomorrow's stock prices will respond to today's news: Stock prices respond to surprising news, all right. But they respond too quickly for you to take advantage. The important market trends occur in anticipation of news that no one will know about for 4-to-6 months. If the market falls because of a bad-news surprise and the new trend is in accordance with bad news to be revealed in the future, the reversal will persist. But if the market falls because of a bad-news surprise and the news yet to be revealed turns out to be favorable, the sudden downtrend will not persist. If you sell because of the bad-news surprise, the market would move up without you, leaving you high and dry.

3. Feeling that you're an investment genius when stock prices rise: Bull markets turn almost every investor into a genius. But as your confidence grows, don't let your risks to grow as well. Eventually, the market will cut you off at the knees.

4. Using leverage: As prices rise and you feel you can't miss, you turn to options or margin (meaning borrowing to buy more). But prices then fall - it's always a surprise - and you're wiped out. Better to avoid leverage altogether. You don't need it. Time and compounding will make you rich.

5. Feeling it's your fault when stock prices go against you short term: Shame leads to damaging investment mistakes. Assume that no matter what you do, the market in the short term will go out of its way to give you the shaft. If you buy, prices will fall. If you don't buy, they'll go up. Assume you'll be wrong, short term, and get in anyway, to take advantage of long-term trends. As the people of the world create wealth over the long pull, stock prices move higher.

6. Failing to diversify: Individual stocks are more volatile than the market as a whole. Avoid them. Instead, buy the market with index funds or, better yet, exchange-traded funds. Obtain double diversity by buying different asset classes, including foreign stocks, real estate investment trusts and long-term bonds. Avoid hot tips.

7. Believing that stock charts tell you what the price will do in the future: They tell you no such thing. Historic price trends are water over the dam. Markets focus on the future, not the past.

8. Trading too much: As Vanguard's CEO, Jack Brennan, said, "The way to make a small fortune is to start with a big fortune and trade a lot."

9. Feeling that you're entitled to returns better than the market can give you: Are you special? To some extent everyone is. It's okay to feel special about the tangible goods you buy. But if you feel entitled to returns that are better than the market, you're cruising for a bruising. You're likely to buy mutual funds that performed especially well last year, just before they slink back into the pack with lousy returns this year. Or you use leverage and get killed. Instead, let the market, time, and compounding do the work.

10. Letting tax-savings control your investment choices: Except for a few basics, like avoiding short-term gains, forget about taxes. Choose investments for their economic value and let the taxes fall as they may. The best way to avoid taxes is to have no income - a poor prospect. Most dividends and long-term gains are federally taxed at only 15 percent. The unrealized capital gains on stocks you hold at death, outright or in the living trust, are never taxable to anyone. Just get in, rebalance annually, and otherwise stay mostly in stocks for life.