Many investors felt like they could do no wrong with their portfolios in 2024, when US stocks were red-hot.
This year has proved to be a bumpier road.
Now that volatility is top of mind, you might be worried about when and where to invest.
Christine Benz, Morningstar’s director of personal finance and retirement planning, cautions against market-timing and not having the protection you need in your portfolio—whether you need to guard against stock market downturns or the bite of inflation.
5 Common Portfolio Mistakes and How to Avoid Them
Here are some common mistakes that you might be making with your portfolio, and what you should consider instead:
1. Timing the Market or Investing All Your Cash at Once
If you have a chunk of money that you want to invest, consider dollar-cost averaging instead of investing the whole sum all at once. If you have the time to do so, invest the money over the course of a few months.
It’s impossible to perfectly time the market. The key is to get your money to work rather than sitting there worrying about whether the timing is right.
2. Not Having Enough International Exposure
International diversification is particularly important for younger investors, or if you have time to ride out some of the bumps that can come with overseas investing.
Benz suggests mirroring the global market-cap split between non-US and US companies in your portfolio. Non-US companies make up roughly 35% of the world’s market capitalization, so it would make sense to have about 35% of your equity portfolio in international stocks.
3. Taking on Too Much Risk Near Retirement
If you’re over the age of 50 and have an all-equity portfolio, you should think about derisking. Consider gradually building out your portfolio’s exposure to safer assets like bonds and cash. Taking steps to protect what you’ve accumulated is important, especially because most people stop working earlier than they expect.
4. Trying to Predict Interest Rates
Benz advocates for building a portfolio that mainly consists of high-quality bonds because they’re your best ballast against a stock market selloff. But she cautions that long-term bonds often act like stocks in terms of volatility because they’re sensitive to interest rate changes. You can stick with high-quality short- and intermediate-term bonds and call it a day.
5. Not Having Enough Inflation Protection
The simple way to defend against inflation is to hold stocks, which have a great track record of beating inflation over long time periods. If you have plenty of time until retirement, you likely don’t need to take steps to add inflation protection to your portfolio.
If you have fixed-income assets, you may want to add some inflation protection. Consider Treasury Inflation-Protected Securities or I bonds. Inflation protection is particularly important for retirees who rely on their portfolios for income.
How to Avoid Common Portfolio Mistakes
Understanding these common mistakes will help you make better decisions for your portfolio. You can take these steps instead:
- Use dollar-cost averaging to get your money to work
- Add non-US stocks to your portfolio
- Protect your money as you get closer to needing it
- Stick with high-quality short- and intermediate-term bonds
- Add inflation protection if you have a fixed-income portfolio
