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The 4 biggest mistakes investors are making

July 24, 2014: 7:38 AM ET

investor mistakes

Investors tend to put money into what's worked in the past. That's not a great strategy for the future.

Everyone wants to know when the stock market is going to tank -- and how high it's going to go just before it does. It would make getting rich a lot easier.

Even Wall Street experts don't know exactly what's ahead in the short run. But what they do know is how to position your investments to make the most money over time.

We talked to several strategists. And here are what they think are the top 4 mistakes investors are making at the moment -- and how to avoid them.

1. Not investing in stocks

You have to be in it to win it, as the old lottery adage goes. That's true of investing as well. Stocks offer the highest returns over many years.

The problem is a lot of people are scared of stocks after the dot com bust and the financial crisis that led to the Great Recession.

"This is the least beloved bull market of my career," says Robert Doll, chief equity strategist at Nuveen Asset Management. "People are being too cautious in an environment where stocks are the asset of choice."

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Too many investors are sitting on the sidelines and keeping their money in cash -- which earns them nothing. Meanwhile, the S&P 500 has gained about 180% since the stock market hit its low point in March 2009.

Some people argue they are waiting for a correction to buy stocks. But it's just as difficult to know when a market has hit bottom as it is to predict when the bull market will end.

When prices are falling, it's easy to get skittish and avoid putting money into the market. Still, the best time to build positions for the long haul is when there are more bargains.

2. Investing in riskier assets

The second pitfall is that investors are putting too much money in long-term bonds and high-yield -- often called "junk" -- bonds.

It's been dubbed the "search for higher yield". Investors want more return for their money right now, but the question is at what cost?

"Investors are so interested in getting the additional yield that they're forgetting how much additional risk they're taking," says Kate Warne, investment strategist for Edward Jones.

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"High yield" is Wall Street speak for "high risk." You get paid more because there's a greater chance that you won't get paid at all if a company or entity goes belly up. At the moment, the junk bond market is so hot that investors aren't even demanding much extra compensation for the risk they're taking on. That could come back to bite them.

Chris Philips, a senior strategist at Vanguard, notes that money going into higher risk assets has been higher than what's being invested in lower risk securities over the past 12 months.

3. Short-term thinking

Another "no no" is that investors have short memories. They tend to look at what did well last year -- or even last week -- and put their money into that instead of thinking about the future.

"Rear-view mirror investing is the greatest pitfall," says Jeffrey Rosenberg, a strategist at BlackRock who focuses on fixed income.

Consider that famed investor Warren Buffett isn't a day trader. He buys companies with the intention of holding them for awhile -- often years. Most investors are saving for retirement, buying a house or other long-term goals. They should have a similar mentality to Buffett.

4. Forgetting inflation

Both Rosenberg and Warne said investors believe that this current environment of low inflation period will stick around. That's not likely.

The economy will eventually pick up more momentum and that will lead to higher inflation. The Federal Reserve will have to raise rates as a result. Rate hikes could come as soon as next year.

"Many investors haven't lived through a Fed tightening cycle -- or don't remember," Rosenberg warns.

Once the Fed starts raising rates to keep inflation in check, many of the bonds that did well last year won't look as good.

Rising inflation will eat away at fixed-income returns. Over time, stocks are the best protection against inflation.

"Inflation really is one of the biggest risks for long-term investors," Warne says. "In many cases, people buying into bonds and not stocks don't realize that stocks are much better at protecting from inflation."

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