Foolish money management can have serious consequences

Don't Be a Fool with Your Money: Avoid These Mistakes

According to an English proverb, “a fool and his money are soon parted.” This cautionary adage predates American stock trading by nearly 200 years, but remains just as relevant for today’s traders and investors.

Whether you’re a long-term investor and looking toward retirement or actively trading with more immediate goals, every financial plan operates according to rules. By developing your own system, you’re better prepared to recognize some of these common impulsive or negligent decisions that can throw you off-course.

“The most consistent traders rely on cold logic rather than hot tips,” said Brian Bachelier, vice president of active trader strategy for Scottrade. “You can’t verify rumors found online or heard at dinner parties, but you can always lay down ground rules for a strategy and measure your success accordingly.”

Consider how these foolish thoughts could get you into investing or trading trouble.

Thickheaded Trading Thoughts

  1. This time will be different!
    No, it won’t. When it comes to evaluating risk on a given trade, past performance is no guarantee of future results. Believing that the law of averages will impact outcomes one way or another is more commonly – and ominously – referred to as gambler’s fallacy. Don’t take shortcuts when it comes to researching a trade on its own merits.

  2. I’ll just hang on long enough to break even!
    Profitability guidelines should influence the entry and exit point of every trade. Emotional traders can hold onto losing picks far longer than they should in hopes of recouping the initial investment. Set a predefined limit, know when to cut bait and shift resources toward the next opportunity.

  3. Don’t frown, double down!
    Fear of loss governs the previous foolish decision, but impulsively doubling down on a loser can rapidly lead to the same outcome. The temptation to catch a possible upswing will exist for any trade that doesn’t go your way, but remember the first example. Only fools throw good money after bad in hopes of a quick fix.

Irrational Investing Ideas

  1. I’ve got my retirement plan all figured out!
    Congratulations – assuming you’re single. However, financial planning for couples is more complicated thanks to employer-sponsored plans that generally plan for the individual. Don’t forget about your spouse and the costs he or she may incur after retirement.

  2. Set it and forget it!
    From evaluating your contribution amounts to reviewing asset allocations, maintaining your financial health is an ongoing process. Scottrade’s Portfolio Review Tool can help you track your investments, and make sure that your portfolio aligns with your plan.

  3. Things will take care of themselves!
    There’s no such thing as a free lunch, and the same goes for financial products. Fees and general overhead expenses are a natural part of your retirement plan. Just be sure you look for transparency to understand what you’re paying for and how it can affect your nest egg over the long run.

“Building an investment plan is the first step, but measuring its success against specific savings goals is a lifelong process,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “The path to retirement involves knowing where you are today and making adjustments for where you want to go tomorrow.”

Next Steps: Visit our Quotes & Research page to evaluate market activity for your next trade, or access screening tools for long-term investors.

The content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

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