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October 27, 2011

Avoid these scary investment moves

If you have kids — or even if you don't — you're probably aware that Halloween is fast approaching.

Of course, you may find the ghouls, witches and creepy impersonations of celebrities to be more amusing than alarming, but, as you go through life, you will find some things that are generally frightening — such as investment moves that are misdirected or go awry.

Here are some potentially scary investment moves to avoid:

Investing too aggressively — In the investment world, here's one of the fundamental truths: The greater the risk, the greater the potential reward. So, by investing aggressively, you can potentially achieve greater returns. But if you invest too aggressively, you can, quite simply, get burned and lose your principal.

Investing too conservatively — You can't invest with no risk. However, you can find investments that offer a higher preservation of principal in exchange for little or no growth potential. But if your portfolio is full of these vehicles, you may never achieve the growth you need to reach your long-term goals.

Failing to diversify — If your portfolio mostly consists of the same type of investment, and a downturn hurts that particular class of assets, you'll take a big hit. But by spreading your dollars among an array of investments you can reduce the effects of volatility on your overall holdings. Keep in mind, though, that diversification can't guarantee a profit or protect against loss.

Chasing "hot" investments — By the time you hear about a "hot" investment, it will probably already be cooling off. And whether it's hot or not, it might not be appropriate for your individual needs and risk tolerance.

Trading too frequently — If you're constantly buying and selling investments to maximize your profits, you may end up actually minimizing your success. Frequent trading will run up commissions and other investment costs — and the greater your expenses, the lower your real rate of return. Plus, by always adding and subtracting investments to your portfolio, you'll find it difficult to follow the type of long-term, consistent, comprehensive strategy that's necessary to help you attain your objectives, such as saving for retirement.

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