By Dan Kiley
Chairman and Chief Compliance Officer, Retirement Corporation of America

Most people invest in the hope of achieving strong, long-term returns. So why put those potential returns at risk by making common investment mistakes? Here are 10 of the most common investment errors—along with some tips on how to avoid them:

Mistake #1
Not having a plan to guide your investment decisions.

You wouldn't drive from city to city in a foreign country without a road map to guide you. If you tried it, you could quickly find yourself hopelessly lost. If you invest without a detailed written plan to guide you, you could also find yourself lost and possibly making decisions that often are completely wrong for you.

To invest wisely, you need a plan that lays out why you're saving money and when you plan to spend it. You'd invest one way if you were putting aside money to make a down payment on a home in the next year, and another way if you're saving for retirement and won't need to draw income from that money for 20 years or more.

You should be in a position to take more risk with your money if you won't need it for years to come. The market may have some losing years over that time but, over the long term, your money should grow. With a long time horizon before you need to actually sell your investments, you should invest with a growth objective so you'll have the nest egg you need to pay for your retirement.

So make a plan before you make major investment decisions. Think through what you are saving for and when you will need the money. Then make investment decisions that are matched appropriately to your time horizon.

Mistake #2
Selecting the wrong asset allocation.

When it comes to asset allocation, the well-known rule is: Don't keep all your eggs in one basket. Each investment has its own unique characteristics.

Stocks offer the potential for growth, while bonds are attractive because they deliver a steady stream of income. Money invested in Treasury bills is super-safe, but doesn't offer much protection against inflation. You can take advantage of the special characteristics of each asset class by spreading your money among them, rather than sticking to only one class.

How important is asset allocation to your investment success? Studies maintain that 80 percent of investment success can be attributed to having the right asset allocation—and only 20 percent to picking the right individual securities within those asset classes.

You shouldn't pick one asset allocation mix for the rest of your life. Your asset allocation mix should favor growth investments when you have lots of time until retirement, and safer income-oriented investments as retirement draws near.

Mistake #3
Not having enough diversification.

It isn't enough just to divide your money among stocks and bonds and cash. You should also diversify within each major asset class. Picking just a single stock fund—say one that invests only in large U.S. stocks—wouldn't give you enough diversification.

To be properly diversified, you should spread your money across several funds that invest in medium sized and smaller U.S. companies, as well as funds that invest in foreign markets. The more you spread your money over investments, the greater the likelihood that you will always have some winning investments each year.

Bonds might rally in a year when the U.S. stock market is down. Smaller stocks might rally in a year when investors are avoiding the blue chip stocks of corporate giants. And foreign markets might rally even though U.S. stocks are depressed.

Continued