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Mistake #4
Having too much diversification.

Although one fund might not be enough for adequate diversification, it is possible to spread your money over too many funds or stocks.

For instance, the more funds you own, the less your investment account will benefit when one particular fund has a stand-out year. Research done by Morningstar, the mutual fund rating company, showed that owning only one fund could be risky—but that adding more could reduce that risk.

More important than the number of funds is how diverse they are. Check out each fund's investments to make certain your choices are as diversified as you think they are. "Don't obsess over the number of securities you own," says Morningstar. "Instead, concentrate on their diversity."

Mistake #5
Having unrealistic expectations.

Back in the high flying stock market days of the late 1990s, polls showed that investors expected to earn 30 percent per year or more on their investments. At that rate of return, even a small amount invested each year would quickly build your savings into a great deal of wealth.

However, as we all now know, reality intruded and the stock market slumped for three straight years—putting an end to those overblown expectations of how much gain their investments might return.

The stock market trend over longer periods of time is still positive. Over a 10-year period, there's a very good chance that money invested in stock funds will appreciate—just not at 30 percent a year.

Based on market performance going back to 1926, stocks have returned an average 10 percent a year, bonds an average 6 percent a year, and cash (invested in Treasury bills) 3 percent a year. You can expect to do better than that some years—but worse in others.

To keep your expectations realistic, assume that a diversified portfolio of stocks and bonds and cash will return roughly 8 percent a year over time, and you probably won't be disappointed.

Mistake #6
Following the crowd.

It was hard, in the late 1990s, to avoid all the hype about technology and the Internet. Investors paid higher and higher prices for dot-com companies with no history, no earnings, and very little chance of long-term survival.

However, the investors who managed to steer clear of the dot-com craze generally did better than those who blindly followed the crowd.

The best time to invest is before the crowd has started to move. Managers of value funds specialize in finding promising investments before they have attracted the crowd.

Tune out the crowd. Buy only because an investment makes long-term sense for you—not because you have seen it in headlines or heard it touted at a cocktail party. The reason these investments are called "hot tips" is because most people end up getting burned!

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