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The 7 Deadly Sins of Investing

by J. Money on Tuesday, February 25, 2014

lucky 7 trains

As I was cleaning up some shelves yesterday, an old copy of Kiplinger magazine fell to the floor baring the (sexy) mug of Mr. Warren Buffett himself. So naturally I had to flip through it and make sure I didn’t miss any of his nuggets of wisdom the first time around ;)

Like, say, this quote of his:

“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

ZING! Or this one – another popular Buffettism:

“Rule number one: Never lose money.
Rule number two: Don’t forget rule number one.”

There were some other gems in there too, but nothing that really actually *helps* you in the real world. Unless you’re brilliant enough to pick a part a balance sheet and/or earnings like that beautiful man is. There were, however, a set of 7 “sins” covered in another article that are always worth repeating since they DO play an active role in our weekly/monthly investing. And even better, it was written by my dear friend Kathy Kristof who you may remember from our Wallet Crashing series :)

These 7 Investing Sins are:

  1. Following the herd
  2. Giving into fear
  3. Hanging on too long
  4. Neglecting to rebalance
  5. Making things complicated
  6. Paying too much in fees
  7. Failing to stick to a plan

Now, I’m not the best example when it comes to investing as you’ll soon see, but here is how I’d rank myself in these fellow 7 departments. In the spirit of complete honesty ;)

Following the herd — Yes, I definitely do this. Only the “herd” these days is my mini-herd of people bloggers who I trust and admire over the general herd out there like those in the media or Mr. Joe Schmo next door. I’ll be the first to admit that I suck at researching and figuring out this stock stuff, so when I hear this “inner circle” of people talk about the same strategy across the board (like, for example, their love of Vanguard and index investing) my ears most definitely perk up. I may not act on it right away so I can come up with my own conclusion over time, but they’re the ones I look to over the general public.

Giving into fear — I give myself an A+ on this one. Once my money’s invested it’s out of site, out of mind for me. I’ll still check in on it every now and then like when I run my monthly net worth reports, but I don’t zoom in and see what stock or fund is doing what – I just let it ride and go about my usual business. I like to do all my thinking/researching once up front and then not 2nd guess it again every other day ;) When the market goes down it’s BUY, BUY, BUY more, baby!

Hanging on too long — I’m not sure if I’ve been invested in the market long enough to be able to answer this one, but if I had to make an educated guess I’d say that I’m prone to hanging on longer than I would the opposite. Mainly, again, because of my “do your homework once and then forget about it” type mentality. For the better or the worse.

Neglecting to rebalance — Okay, now THIS one I’m horrible at. Again for all the reasons already mentioned – I don’t like thinking about this stuff once it’s invested. Now once I move all my funds into Vanguard this year it’ll help with a lot of this (I’m considering putting a bulk of my money into a few index funds), but for now it’s all over the place. I just go with the flow and add stuff to it without any care of what I already have – shame on me, I know. But it’s the truth, and I’m working on it :)

Making things complicated — One of the best moves I’ve made by far with my investments have been keeping everything under one roof (that of USAA‘s). It’ll probably move to Vanguard soon as I’ve been alluding to, but knowing that you can log into one place and see everything you need to on one screen can really do wonders. If only to be able to check on stuff routinely or make it easy on your significant other (who doesn’t handle the day-to-day money stuff). I have admittedly made things a little more complicated with my IRA Test where I divided up $180,000 to see which route would be the best  (Hint: it was the one that was *not* actively managed), but that aside I like to keep my money how I do my life – simple and drama-free :)

Paying too much in fees — I probably get an F in this category as well, only I really couldn’t tell you for sure since I HAVE NO IDEA how much I actually pay! (You want to run away and stop reading this blog forever now, don’t you? ;)). I don’t know if this is because I feel like USAA is awesome and therefore don’t need to worry that much, or if I just don’t fully understand how much ittruly matters (I’m guessing it’s more of the latter?), but I’ll admit I need to focus on this more to at least get a grasp on what I’m dealing with here. And again, this will change with my switch to Vanguard since it’s all clearly labeled and easy to follow (and because my “mini-herd” of bloggers continue to rave about this organization and its fees, it’s actually harder to NOT learn about their fees than it is the opposite! Haha… which is certainly saying something ;)).

Failing to stick to a plan — Just like with the fees part, I’m not too sure if I have an actual “plan” per se when it comes to investing. Unless you count “investing as much money as possible so I can retire happily one day” an official plan ;) I can tell you that my risk levels are turned to super aggressive over conservative since I’m relatively young, and that I don’t plan on touching any of this money for quite some time, but other than that I don’t really have a “plan”- plan. Do you guys have one?

If you couldn’t tell by now, investing isn’t my strong suit ;) At least in terms of *what* my money’s being invested in. We put in anywhere from $15,000-$30,000 a year so I’m definitely doing that right, it’s just I could potentially be making more off it if I paid *closer* attention to the details – something I cringe at. I’m a follower of the 80/20 principle and once I feel I’m at 80% awesomeness, I tend to stop and move on to the next thing. It’s not like my investments haven’t been growing *at all*, ya know?

But maybe you have some pointers for me/us to consider though? Any sexy words of wisdom yourself like our good friend Mr. Buffett has? My ears are definitely open…

These are the deadly sins of investing to think about today, anyways. Courtesy, again, of Kiplinger magazine. If you’re interested in reading the entire article, and what the pros suggest you do about these (which you’ll learn more from than my crazy commentary!), you can check it out here.

If I haven’t scared you away, I’ll see you again tomorrow ;)

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[Photo by freezr]


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{ 54 comments… read them below or add one }

1 moneystepper.com February 25, 2014 at 6:07 am

If you are going with Vanguard, you probably aren’t going to overpay on fees!

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2 J. Money February 25, 2014 at 7:00 am

That’s what I hear!

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3 theFIREstarter February 26, 2014 at 1:05 pm

You can also practically forget about rebalancing if you go for one of their diversified funds which contain stocks and bonds and wotnot. They are called life strategy funds over in the UK. I’m not sure what the equivalent is in the US but they’ll definitely have one/some as you always have more investment choices than us! :)

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4 MMD February 25, 2014 at 6:21 am

I fail in the make things too complicated category. At one time I was going to learn more about options and stock shorting because I thought that would be a cool niche of investing that most people weren’t exploiting to their full advantage. But the more I learned about it, it just felt way overly complicated and too much like gambling. Now I just look for ways to simply make more money so I can save more money. Keeping it simple …

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5 J. Money February 25, 2014 at 7:04 am

I like that plan :) Simple can be REALLY powerful.

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6 Mr Ikonz February 25, 2014 at 7:03 am

Great list. Looking through the list, I’ve committed every single one of the sins in the past.
I’ve switched to index/beta investing now, so I have taken most of the emotion out of the process.

My strategy is to invest for 20 years, which means I’ve taken the rest of the emotion out of if due to such a long investment timeframe.

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7 J. Money February 25, 2014 at 7:08 am

Long term is where it’s at! Luckily I’ve never had a problem with that one, but obviously I do in other areas, haha…

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8 Stefanie @ The Broke and Beautiful Life February 25, 2014 at 7:48 am

I’m a “set it and forget it” kind of investor. Every so often I’ll check in, but I try not to check too often and freak myself. I’m too young to be worried about pulling my money out of my investments.

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9 Holly@ClubThrifty February 25, 2014 at 8:14 am

I freaked when I realized how much $ we were paying in fees on our old retirement accounts. I moved everything to Vanguard.

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10 Randy February 25, 2014 at 8:18 am

J, you should check out futureadvisor.com. I signed up for a free account recently. They analyze your portfolio for diversity, performance, tax efficiency, and fee efficiency, and provide recommended actions. Even if you don’t end up following the recommendations, it might be helpful to see where you’re at. Just take a few minutes!

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11 J. Money February 26, 2014 at 11:29 am

Oh that’s cool, never heard of them – thanks :)

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12 John Grisham February 25, 2014 at 8:31 am

Dude! In the wake of the housing crisis, and big time agencies screwing everyone over, it’s about time that people educate themselves on buying and selling a home. There’s no way we should expect these “big wig agencies” and lobbyist groups to do the right thing. I’m all for books like Simple and Sold and sites like Zillow and Trulia. Not only could you probably prevent getting screwed, but you’ll pocket tons more money.

Here’s something I learned: Let’s say your house is worth $400,000 and your equity is $60,000. Let’s say you hire a real estate agent who charges the customary 6 percent commission. Even if your home sells for its full value, you’ll end up paying the agent $24,000. There goes 40 percent of your equity. There goes a significant chunk of real, hard cash that cannot be recouped.

$400,000 house
60,000 equity
– 24,000 real estate commission at 6 percent
= 40 percent of your equity gone!
Your home equity is like your 401(k): these things are financial Holy Grails. Unless it’s a matter of life or death or putting food on the table, don’t touch either.

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13 J. Money February 26, 2014 at 11:36 am

I think you added this to the wrong post? :)

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14 Brian@ Debt Discipline February 25, 2014 at 8:34 am

I’m in hunting and gathering mode right now. Collecting as much investing information as possible to expand upon once we are debt free. I do have a 401k, but I guess I fall into the Neglecting to rebalance category today.

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15 J. Money February 26, 2014 at 11:38 am

I feel like as long as you’re plowing money into it though you’ve done 80% of the work. I want as much money as possible working for me as the next guy, but I’m not one to fuss about if it’s a million dollars or a million dollars and 10,000, haha.. it’s all a big chunk and I’d be proud of myself to hit 1 Mil (or whatever the goal is)!

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16 John S @ Frugal Rules February 25, 2014 at 8:41 am

I fail in the hanging on for too long category, even though I have a specific section in my investment plan for it. I ridiculously think a stock is going to come back and 9 times out of 10 it doesn’t. I could not recommend the Vanguard route more – for fees (or the lack thereof) and the ease it’s a hands down winner. I saw way too many people make investing much more difficult than they had to in my day job and Vanguard can definitely solve a lot of that.

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17 a terrible husband... February 25, 2014 at 8:50 am

I used to go way too complicated. I did alright, I guess, but it took me way, WAY too much time. A sweet little index fund or two or three and some auto-investing has saved me tons of time and money. Love it.

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18 Parsox February 25, 2014 at 9:11 am

Long time lurker – thanks for the blog!

I recommend you check out Bogleheads.org if you have not done so. Its named after Jack Bogle, the man who started Vanguard. It has very good information about low fees (expense ratios) and asset allocation percentages. The idea is to keep fees lows, keep asset allocation simple, and be consistent about investing over time.

You may also want to check out whotecoatinvestor.com

Thanks again – and I really like your bloggers net worth tracker!

/r
Parsox

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19 royalsfan February 25, 2014 at 11:57 pm

Low fees don’t guarantee better returns. See below and I explain.

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20 J. Money February 26, 2014 at 11:39 am

Thanks Parsox! Glad you enjoy the blog – all lurkers are welcome :)

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21 JayP February 25, 2014 at 9:19 am

Check out the bet that Warren Buffett has to the tune of $1B. It goes like this – he wagers that simple index funds will outperfom hedge funds due to the lower fees. He’s winning the bet so far. Hes always railing on the exorbitant fees managed funds and hedge funds charge. Best bets are low cost index funds IMO. I have seen loaded funds that charge as much as 7% right off the top for the saleman’s commision. Hard to make up those types of charges, even if the funds do well.

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22 J. Money February 26, 2014 at 11:42 am

Nice!! And he’s no dummy ;)

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23 jane savers @ solving the money puzzle February 25, 2014 at 9:25 am

I listened to Suze Orman praise Vanguard for years and I was pretty quick to follow the herd and buy when it finally come to Canada. I frequently disagree with Suze because she thinks we need much more money to retire than we actually do.

I have 107 shares in a high yield Canadian dividend ETF and plan on having 300 shares by the end of 2014. The shares are currently trading for $29 and are averaging $0.08 dividend per month per share.

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24 J. Money February 26, 2014 at 11:46 am

Hot dogs!

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25 Mark Ross February 25, 2014 at 9:28 am

I’m not an investor YET, but I think I will be doing some of the things that you do, and one of them is your “do your homework once and then forget about it” mentality J. :)

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26 EL @ MoneyWatch101 February 25, 2014 at 9:42 am

I’ve been with vanguard for over 10 years. The first thing I look at when I invest is the distribution the fund gets and the fees. Buffett is great with giving advice, I hope to inspire others just like he has in his life.

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27 royalsfan February 25, 2014 at 11:56 pm

Fees are overrated see my post below.

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28 Liz February 25, 2014 at 9:51 am

My biggest investing mistake is not investing sooner while I was in college. I had an itch to start investing 2008 and 2009 but I was scared.. I wish I would have listened to my instincts and just gone for it. Could have made out pretty well : )

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29 J. Money February 26, 2014 at 11:48 am

Oh man yeah – buy low, sell high – baby!

Hopefully you’ve since invested though :) If not, start now!

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30 Kali @ CommonSenseMillennial February 25, 2014 at 10:02 am

Love this list – pretty good guidelines if you need to know what to avoid! Vanguard definitely helps investors avoid paying too much in fees and over-complicating things.

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31 SavvyFinancialLatina February 25, 2014 at 10:53 am

I have a problem with holding on to cash too long and not investing it sooner. I’m waiting to pull the trigger on our ROTH IRA contributions for 2013. I just feel like the stock market is too high. But I’m going to invest by next week because dividend season is coming and I want to get the dividends.

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32 J. Money February 26, 2014 at 11:50 am

I’ve tried timing the market and it never works. So now I just plop it in whenever I know what I want to do with it and then cross my fingers and pray it was during a good time ;) I’m one of those “happy at 80%” type guys so as long as it doesn’t crash drastically the next day/week/month, I’ve learned to be okay with things.

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33 charles@gettingarichlife February 25, 2014 at 11:56 am

Be greedy when others are fearful, and be fearful when others are greedy. Everyone hates emerging markets because of inflationary fears, everyone’s in the US. Is it a god time to buy as it is an all time low in regards to earnings metrics. The US market near high now, however in 2009 the market was “overpriced” based on an earnings perspective. Set it and forget it and don’t time the market.

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34 James @ Flannel Guy ROI February 25, 2014 at 12:49 pm

Even within Vanguard there are pretty big variations in expense ratios by fund. Their fund of funds seem to be more expensive than managing your own, and make sure you are buying admiral shares if you go the mutual fund route (vs. ETF). I just realized how much money I was leaving on the table by using a life strategy fund. But the upside of not having huge retirement savings is that I caught it early, so that is the positive spin on things there :)

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35 James @ Flannel Guy ROI February 25, 2014 at 1:00 pm

BTW, I am 100% in favor of the 80/20 approach… too much to do and that last 20% just takes so much extra time and effort!

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36 J. Money February 26, 2014 at 11:51 am

YES! I’m totally going the Admiral route for sure. Which is easy to do since I’m moving large pockets of money over all at once when I pull the trigger. I’m glad you caught it when you did! Maybe you had less than the $25k in there before or something? ;)

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37 Big Guy Money February 25, 2014 at 1:17 pm

Fees are huge. Essentially they directly take away from the fund’s return.

Let’s take your invested portfolio as of the January 2014 update – $357,339.41.

-If you have the entire thing invested in a 1% Expense Ratio fund, you’re paying $3573.39 PER YEAR in fees.
-However even if you’re invested in a Vanguard LifeStrategy fund that James mentions above as being ‘high’ for Vanguard (approx .18% ER), you’re paying $643.21 in fees. By investing in the underlying funds of the LIfeStrategy series you can get fees down to less than .10%.

Being J Money, you definitely understand the power of about $3000 less compounding year after year!

To quote Jack Bogle (founder of Vanguard), “In investing, you get what you don’t pay for.”

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38 J. Money February 26, 2014 at 11:52 am

haha… I’ve never heard of that quote before – I like it :) That Jack Bogle seems to be a pimp! I wonder if he chills with Buffett any?

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39 Matt February 25, 2014 at 1:56 pm

Great tips, I wish I could say I avoid these 7 investing sins but I am often guilty of #1 and #2 and I can say that it has burned me on many investments!

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40 Shannon @ Financially Blonde February 25, 2014 at 4:15 pm

I agree with this list, but agree that it is difficult to know if you are paying too much in fees. If you are paying an advisor, I think you are paying too much in fees (and I used to be an advisor, so I speak from experience), but when you are looking at mutual funds vs. ETF’s it is tough to know because some of the best performing funds (on a total return perspective) are mutual funds with higher fees. At the end of the day, asset allocation and rebalancing are keys to investment success in my book. For retirement assets, 100-your age should be in equities (or a little more if you are more aggressive but never 100%) and the rest fixed income or alternative and for more medium term needs, 50/50 is probably a good split.

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41 Claire (Eat Well. Party Hard.) February 25, 2014 at 6:00 pm

Do you have an “Investing 101 for Dummies” article anywhere on your site, or do you know of one elsewhere on the web? I have next to NO knowledge about how it all works, but also know it’s one of those things smart people do. Your advice would be super appreciated!

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42 Steve February 25, 2014 at 8:10 pm

Lots of books, or my preference, books on CD, that I listen to on my drive to and from work that can teach you about investing. One Up On Wall Street is a good starting point. Ramit Sethi is one author to consider, the list is endless. I would caution though that for most people, its much better to use a financial adviser instead of doing it yourself. If you do not have the time, the interest and some math skills, I wouldn’t invest on my own. You may want to look at Dave Ramsey’s Endorsed Local Providers, ELPs or talk to friends and family about who they use. Regardless of what you decide, the best advice I have for you is start as soon as possible. The earlier you start investing, the better as you will read over and over again in any decent book on investing.

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43 J. Money February 26, 2014 at 12:01 pm

Thanks Steve!

I don’t have any solid 101 posts here on this blog, mainly because it bores me to death (haha…), but check out this series from JL Collins. I’ve only read a few of the articles but people RAVE about it:

http://jlcollinsnh.com/stock-series/

It’s pretty biased towards Vanguard though, fyi :)

Here’s another one:

http://obliviousinvestor.com

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44 Ryan @ Impersonal Finance February 25, 2014 at 6:20 pm

Since you’re a Buffet fan (who isn’t. I also like buffets, but that is neither here nor there) a couple of his maxims will help anyone avoid a few of these sins. Mr. Buffet’s favorite holding period is forever. So, if you buy a business that even an idiot can run, you don’t have to worry about holding onto it too long. Not only that, if you hold onto it, collecting dividends and not selling any of the actual stock, you can dramatically reduce your fees from transactions. Of couse, not everyone has 40B in the bank to mess around with… but still solid advice for us average-but-not-overly-so folk.

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45 J. Money February 26, 2014 at 12:02 pm

Indeed! I’m revert to holding forever just out of laziness anyways – it’s perfect! ;)

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46 royalsfan February 25, 2014 at 11:51 pm

Just so all of you know fees are very misunderstood in the financial world.

Let me give you an example:

Let say year end return published in Morningstar for Vanguard’s S and P 500 Index fund was
15% for 2013 and Fidelity’s S and P 500 Index Fund was 15%.

Fees at Vanguard are 0.01% and fees at Fidelity are 0.75%.

Which fund is better and which one makes the most money for the investor?

The answer is neither. FEES ARE FACTORED in before TOTAL return not after. So the only thing that matters is total return.

If another fund returns 16% and the fees are 4% guess what? It’s a better fund and you make more money in the end!!!

Vanguard keeps fees low but if returns aren’t higher than their competitors who cares???

They MAY give better returns, but LOWER fees don’t make them superior.

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47 J. Money February 26, 2014 at 12:04 pm

I’ll agree with that. A perfect world is low fees and high returns :) Though usually you don’t get high returns consistently, whereas the fees are – so that’s something. Not that I’m the expert here obviously – I don’t even know how high my fees are currently!

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48 Crystal February 26, 2014 at 5:55 pm

I think are only “sin” is failing to follow a plan…we have a general investing plan, but we don’t have a normal amount to invest. It all depends on how fast we get our Roth IRA’s fully funded…

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49 Marissa@Thirtysixmonths February 27, 2014 at 2:57 am

This problems really occur in investment fields. It’s nice to hear that people can be aware of this. You’re a great writer J. Money. I love reading your article.

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50 J. Money February 28, 2014 at 5:55 pm

Awww, thanks Marissa! Appreciate it!

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51 J Dub February 28, 2014 at 12:28 am

I’m heavily invested in Vanguard target date and Wellesley funds but not everything. I use Fidelity to hold all of my rollover IRA’s and Roth IRA. I’ve taken the slow and steady approach and set it and forget it. My company just started offering the Roth 401k. I’m sinking 7% into that and 15% into my 401k. My company matches 3%. Started investing with my first real job @ 21 and I’ll be 38 in march. In those years of investing I’ve learned a few lessons some harder than others. Would love to retire early to a log cabin in the mountains!!! Maybe one day, a man can dream. Cheers!

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52 J. Money February 28, 2014 at 5:56 pm

Sounds like you’re on a good track to getting to that log cabin too! Dreams will = reality soon, my friend – keep investing!

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53 Kalen Bruce March 1, 2014 at 1:58 pm

Doing #7 because of #2 is common and dangerous. This is especially true for value investors or people who want to be value investors anyways. They have a plan to own a company’s stock for the long haul, but they give into fear and sell when the company starts to tank. It’s a dang shame!

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54 Alexi Zemsky March 15, 2014 at 6:28 am

Personal capital is fantastic for both listing the fees for all of your funds, as well as showing you your overall asset allocation.

It takes about five minutes to set up.

The fee piece, in particular, is very motivating in terms of taking action steps to improve your portfolio (i.e. moving money out of expensive funds and into inexpensive index funds.)

Personally, I’m not a fan of paying them a dime for their investment services.

Alexi

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