Why Most People Fail at Investing
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Investing is hard right? There is so much to learn and every time you turn around it seems like there is a better way to manage your portfolio.
Add on top of that the desire to buy high quality dividend stocks using stock market research tactics and it feels like you are never done.
I suspect that most people fail at investing. They make very silly mistakes that lead them to sub-par performance and a portfolio that constantly trails behind the overall returns of the market. The trick is understanding what these mistakes are and acting on them.
What are those most common mistakes? I believe there are really five key mistakes that investors make that lead them to investment failure.
1. Impatience
Impatience is an emotional response to having to wait for something to happen. Think about this scenario:
You bought a dividend growth stock last year with the hopes that the stock price would rise by 5 – 10% in the year. However, as you look at the stock now, it is flat for the year. What do you do?
The impatient investor sells the stock and moves on to the next one. The patient investor checks the research to determine if it is still worth holding and if everything looks good, waits it out. If the asset is sound, the returns should come.
Take Away: Let your investment portfolio do its work. Don’t force things.
2. Poor, or no, Asset Allocation
Asset allocation is the most important investment decision you can make. Good investment returns depend highly on a sound and diversified asset allocation. If your portfolio holds a smattering of assets thrown together with no reason then you might be in trouble.
Take Away: Understand your risk profile and build a diversified asset allocation
3. Paying too much in fees
One of the most popular posts on this blog is the Tyranny of Investment Fees. In that post, I summarize John C. Bogle’s view that investment fees actually compound like investment returns, only by taking money away from you at a faster and faster rate over time.
Take Away: Review each and every asset in your portfolio and the associated fees you pay. If they are high, strive to lower them.
4. Believing the Marketing Speak
The investment business is essentially a marketing and sales business. Investment companies try to separate you from your money and invest with them. This provides them with fees and income.
The trouble is that this marketing is not always correct and can be quite manipulative to make you act. You need to remember that they are trying to get you to investment with them, and may not have your best interests in mind. If you want to see some of the tricks they play, have a look at this post: Watch Out for These 6 Slick Mutual Fund Marketing Tricks.
Take Away: Always review investment marketing with a skeptical eye. If it seems to good to be true, it is.
5. Lack of Constant Learning
Investing takes work, and most of that work comes from the need to constantly work to learn as much as possible about the investing process. Many unsuccessful investors just read snippets here and there and then put in place a smattering of different strategies.
Take Away: Keep reading and learning.
Summary
The benefits of a solid dividend growth investing strategy can be negated quickly by making some mistakes. These five mistakes are easy to make but are also easy to fix. Pay attention to them and you will improve your portfolio performance over time.
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8 Comments on this post
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David said:
Good, thoughtful post. And OK, I have been guilty of a couple of these. I try to control impatience by a) not watching the market all the time and b) not watching CNBC.
January 22nd, 2010 at 11:26 pm -
Greedradio said:
Good stuff as always, have a good trip.
January 25th, 2010 at 7:54 am -
Daddy Paul said:
Asset Allocation- Did you ever see one of those guys who has 90% of their 401K in company stock and see’s nothing wrong with it? You can’t talk them out of it either.
January 25th, 2010 at 8:29 pm -
Ryan @ Planting Dollars said:
It’s amazing how people over complicate the market or want to have an incredibly active role in their investments. From that standpoint looking at the market long term I take the same strategy as Buffet which is the buy and hold, reducing transaction costs and finding businesses that are worth their lick in the indefinite long term. Number 1 I think is the greatest enemy to all.
February 6th, 2010 at 10:26 pm
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