June 2009

During one of the most tumultuous times in market history, it is interesting to assess what common mistakes crop up for investors, new or old. You can improve your financial situation by avoiding pitfalls that are easy to see, and yet routinely trip up even the savviest investor.

I believe that with rapidly changing conditions engulfing the markets, you should keep a few basic principals in mind as to guideposts for your financial security. First, always keep enough money on hand for emergencies. You never expect to lose a job or fall ill but keeping six months of income in a separate rainy day account is an important safety valve for your finances.

On the other hand you may have ramped up cash holdings dramatically during the last year, and now is not a time to delay the reinvestment process. The ironic counterpoint to keeping enough cash for emergencies, is too much cash can cause real damage to your financial future. Time is a great ally when investing. And sitting in cash while the market sails ahead is not only painful for those who like to win but also can inflict lasting damage on your financial position.

Continue to fund your retirement plan. Such contributions provide you tax relief and help you grow assets in a tax deferred account that will be crucial to your future retirement plans. Some investors unwisely pull the plug when markets are low in price and only return to regular investing when the markets are high. Pursue a monthly investment pattern for retirement dollars.

Another major mistake made by many investors is buying yesterday’s winners. Don’t buy a security because its share price has been rising rapidly in recent months. Evaluate its potential for continuing the positive trend. Last year’s best stock is rarely this year’s leader.

And lastly, when you buy a stock be prepared: stock prices can go down as well as go up. If a stock does go down in price, and yet the underlying business is sound, don’t sell off at a lower price in panic. Buying high and selling low is a recipe for impoverishment not wealth creation. Best practice is to carefully choose your buy point, and then establish clear rules for selling.

Remember that your particular goals and characteristics may call for a specific set of actions.

Dan Joraanstad
Senior Vice President-Investments, Wells Fargo Advisors

Past performance is not indicative of future results.
Car #: 0609-1374