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While fixed-income investing is seen as being on the more conservative end of the spectrum, individuals can nonetheless make mistakes that prove destructive to their long-term financial health. Here are ten of the most frequent mistakes made by bond investors:

1) Buying yield. Many investors simply look at the yield figures when comparing investments, and then pick the one with the highest payout. This is a mistake, for two reasons. First, the yield figure you see is often based on the payouts made in the past 12 months, not the next 12 months. Learn more about this issue here. Second, higher yields are typically accompanied by higher risk. Those who are conservative by nature or who need their money within a short time period (usually three years), may be better off in a fund that yields less but that will provide a higher degree of safety .

2) Taking too much risk. This is the corollary to item number one. Investors always need to make sure that the level of risk that they take is appropriate for both their risk tolerance and their objectives. For example, a retired investor with limited savings should be focused on safer investments that will maintain their principal rather than loading up their portfolio with high yield bonds or emerging market debt. Always look at the performance history of the fund to get a sense of how much it can lose when it experiences a bad year or calendar quarter. If you see losses that will dangerously deplete your savings or keep you up at night, look elsewhere.

3) Not taking enough risk. This is a mistake often made by younger investors. For people in their twenties and thirties, there is plenty of time to sustain short-term losses on the way to longer-term gains. As a result, younger person with all or most of their longer-term savings in conservative investments – such as money market funds or short-term bond funds – may be missing out on higher potential returns by putting too much of an emphasis on safety. The exception, of course, is when you need the money for a specific goal (such as a home or graduate school) within three years. In that case, safety of principal should remain the top priority.

4) Buying tax-free bonds when they aren’t needed. At first glance, tax-free investment income sounds compelling. After all, who wants to pay higher taxes? However, investors who are in the lower income tax brackets may find that taxable bonds actually offer a higher after-tax yield than tax free income. To find out if you would be better off in taxable, rather than tax-free, bonds, see my article Are Municipal Bonds Right for You?

5) Putting tax-exempt investments in an IRA. Since tax-free investments typically pay lower yields than their taxable equivalents, they only benefit investors when their after-tax yields are higher than taxable equivalents. This benefit can only occur if you hold your tax-exempt investments in a taxable account. If you hold them in an Individual Retirement Account (IRA). where taxes are deferred, you gain no benefit from the tax-free nature of the investment – all you get is a lower yield. As a result, consider placing taxable income-paying securities – such as dividend-paying stocks – in your IRA, and holding tax-free investments in a taxable account .

6) Not looking closely enough at expenses. Mutual funds and exchange-traded funds make money by charging fees. These fees come right off the top and reduce the rate of return earned by a fund’s portfolio. For instance, if a fund with a 1% management fee owns securities that produce a total return of 5% in a given year, the investor will see a return of 4%. This may not seem like much, but over time it adds up. Most investors are aware of the power of compounding in generating wealth over the long term. Think of the expense ratio as compounding in reverse – over a long-term period, losing 1% to fees every year can take a big chunk out of your return. As you narrow down your investment choices, take care to emphasize – rather than ignore — the issue of expenses.

7) Insufficient diversification. While “bonds” are often lumped together into one category, different segments of the market react differently to the same set of inputs. For example, stronger economic growth can weigh on the performance of U.S. Treasuries. but it can help high yield bonds. Conversely, rising investor nervousness will typically help Treasuries, but weigh on corporate. high yield, and emerging market bonds. These are just a two examples among the multitude of factors that can affect the performance of bonds, so the key takeaway is to make sure you diversify your savings among a broad range of investments in order to reduce risk, while at the same time making sure that you are staying within your risk tolerance and fulfilling your investment goals.

8) The wrong kind of diversification. Investors are always told not to put all their eggs in one basket, but there is a limit to just how many “baskets” will provide the appropriate level of diversification. Having too many holdings raises the odds that you will lose track of your investments and make your tax planning more difficult. Also, investors often spread their assets among a number of different funds or ETFs without looking carefully at the underlying holdings. If you hold several funds that are invested in the same area of the market, your portfolio can be as “undiversified” as it would be with just one fund. As a result, investors should take the time to ensure that they have a manageable number of investments whose underlying holdings are not subject to the same set of risks.

9) Chasing hot managers or investments. “Look at how well it’s performed in the past!” is not a valid explanation for choosing an investment. Investors often look at past performance and gravitate to the funds or securities with the best historical returns. However, there are two reasons this doesn’t make sense: first, past performance truly is no indication of future results, and second, an investment that has performed very well may be vulnerable to “mean reversion” in the form of weaker performance in the years ahead. No trees grow to the sky, after all. Individuals are therefore better off choosing investments based on their own goals and risk tolerance rather than simply picking investments from the top of the performance charts.

10) Looking at the coupon rate rather than the yield to maturity. The coupon rate is the periodic interest payment that the issuer makes during the life of the bond. For instance, if a bond with a $10,000 maturity value offers a coupon of 5%, the investor can expect to receive $500 each year until the bond matures. However, a high coupon doesn’t necessarily equate to a high yield. Since bonds trade on the open market, the actual yield an investor receives if he or she purchases a bond after its issue date (the “yield to maturity ”) is different than the coupon rate. As a result, it’s essential to focus on the yield to maturity (the yield you will actually receive) instead of the coupon.

Disclaimer. The information on this site is provided for discussion purposes only, and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. Always consult an investment advisor and tax professional before you invest.