Three Things Investors Do to Get Into Trouble

I find the recent market action very interesting, especially the headlines in the newspapers and the chatter I hear on elevators, during lunch, or before the start of meetings. The main topic of course is the recent market action and the intense volatility this is having on personal portfolios. There is a lot of stress about it across the board, from young to old and wealth accumulators to close to retirement. The problems are global - I am holding these conversations in Norway and during video conference calls with my colleagues in North America, UK, and Malaysia.

During these conversations, I have come to some unscientific conclusions of three things that investors do to get themselves into trouble. They are really simple things, however if every investor took some basic action to ensure they did not become a problem in their portfolios then market action like we have recently seen would not be as much of an issue as it is. Here is what I think are the three basic problems as identified during my “research”:

First, investors do not act long term

Overall, it appears that most investors may think they are long term investors. However, their actions indicate that they are really short-term investors. There is no patience to wait for markets like this to pass and rash decisions are made, selling stocks during the panic. Investing is not a 2-week game. It is a 10+ year game and markets are going to go up and down no matter what our governments do.

Second, investors hold portfolios that are not diversified

It appears that many investors I talked with do not hold diversified portfolios. There is way too much in equities and the equities that they hold are very concentrated in one region (North America) and in only a small number of holdings. If only most investors had good diversification across various asset classes, various regions around the world, various market caps, and across both value and growth then the dives in the markets would be buffered. Not all asset classes are going to drop 25% like an all equity portfolio would have done.

Third, investors hold too much in a company plan

The third and last observation I have made is that folks with awesome company sponsored investment plans (my company included) do not proactively manage these holdings and they let them become way too large as a percentage of their portfolio. It is easy to do - these programs are often on auto-pilot and the investments just happen automatically and before you know it 20 - 30% (or more) of your portfolio is concentrated in one stock. If the stock is going up then all is good - but if it is going down then the results are drastic. The solution is simple - limit any stock holding in a portfolio to no more than 5%. This may mean selling shares in your company from time to time but it is a small price to pay for some added diversification. Invest the funds in other asset classes (regions, market cap, fixed income) and spread it around. Ultimately you are managing risk.

I think that if investors just did these three things right then times like these would be much easier to bear. They are not rocket science nor are they hard to do. It does take some effort and time, but ultimately your retirement depends on it.