There are a lot of investing mistakes that people can make in the day-to-day or year-to-year management of their portfolios. The purpose of this blog is to talk about things I have done to avoid mistakes. I was challenged by a friend of mine recently to come up with what I thought were the top 3 investing mistakes that a person could make. The key was that it needed to be the top 3 and not the top 10 or even the top 5 – this required me to think long and hard to weed out the other bazillion investment mistakes to choose only 3. I then had the idea to cheat a bit – a way in which I could (with the help of the blogging community) come up with a much broader list of investing mistakes.
I would like to challenge other bloggers to come up with their list of the top 3 investing mistakes they believe are. This way, at the end we will hopefully have a huge list of potential mistakes that all investors can draw on to determine the best way to manage their portfolios. After presenting my own top 3, I will tag three other personal finance bloggers to create a post that presents their own top 3 list.
My Top 3 Investing Mistakes
1. Not creating and adhering to a properly structured asset allocation
The most important factor of a portfolio is the asset allocation, and the mistake is when people do not structure an asset allocation and choose to invest in a non-strategic or haphazard manner (i.e. buying a bit of this, and a bit of that).
2. Compulsively Checking Your Stock Prices
I believe this is a huge mistake that long-term investors make and the reason it is a mistake is that it leads to emotional responses. This constant monitoring in my experience has lead me to make decisions not with the facts but with my own intuition and feelings, which has burned me every time!
3. Keeping Your Investment Assets in a Savings Accounts
This seems pretty obvious, but I think it is amazing how many people only invest their money in cash as opposed to assets that have the potential for long term appreciation. A savings account does not provide any inflation protection and over time the spending power of the money in the savings account is reduced as the prices of goods and services rise.
Tag You Are It…
To keep this going, I want to tag the following three bloggers with their choices for their top 3 investing mistakes. I also challenge them to tag 3 other bloggers to see how long we can keep this going. In addition, if you would like to participate please post a comment directing us to your post with the top 3 investing mistakes – that would be awesome!
1. Mike at Four Pillars you are tagged
2. D4L at Dividends4Life you are tagged
3. CC at Canadian Capitalist you are tagged
Comment number two is interesting. I remember reading an academic piece several years ago that attributed the increase in the “risk premium” demanded by the market to the explosion of quotes services available to everyone. The theory was, when you only saw your portfolio quarterly (or even annually), you missed a lot of the gyrations of the market but in the age of live real time streaming quotes on everyone’s screen, the perceived volatility increases and everyone demands a higher risk premium.
One mistake to add to your list is “entering a trade without a plan”. When you get into a trade, you need to know why you are there and what will cause you to question your original thesis.
Dividend growth investor
I would like to be tagged as well.
Three mistakes that I have done:
1) Not having an investment plan or changing investment strategies too often. Without an investment plan, you are guaranteed to not reach your financial goals and be stuck in the mud forever.
2) Buying into HOT sectors, which have experienced a strong uptrend over past periods. Buying stuff just because it is going up works for some time, untill your investment starts falling and you keep praying it will go up..which never happens.
3) One big mistake is that I didn’t start investing at an earlier age. If I have kids, I would strongly advise them to invest their money from high-school summer jobs in index funds and just let the money compound forever.
Thanks for the link – I’ll see if I can do it for Wednesday.
I’ve been at this a long time… here are ten to avoid:
Preventing Investment Mistakes: Ten Risk Minimizers
Most investment mistakes are caused by basic misunderstandings of the securities markets and by invalid performance expectations. The markets move in totally unpredictable cyclical patterns of varying duration and amplitude. Evaluating the performance of the two major classes of investment securities needs to be done separately because they are owned for differing purposes. Stock market equity investments are expected to produce realized capital gains; income-producing investments are expected to generate cash flow.
Losing money on an investment may not be the result of an investment mistake, and not all mistakes result in monetary losses. But errors occur most frequently when judgment is unduly influenced by emotions such as fear and greed, hindsightful observations, and short-term market value comparisons with unrelated numbers. Your own misconceptions about how securities react to varying economic, political, and hysterical circumstances are your most vicious enemy.
Master these ten risk-minimizers to improve your long-term investment performance:
1. Develop an investment plan. Identify realistic goals that include considerations of time, risk-tolerance, and future income requirements— think about where you are going before you start moving in the wrong direction. A well thought out plan will not need frequent adjustments. A well-managed plan will not be susceptible to the addition of trendy speculations.
2. Learn to distinguish between asset allocation and diversification decisions. Asset allocation divides the portfolio between equity and income securities. Diversification is a strategy that limits the size of individual portfolio holdings in at least three different ways. Neither activity is a hedge, or a market timing devices. Neither can be done precisely with mutual funds, and both are handled most efficiently by using a cost basis approach like the Working Capital Model.
3. Be patient with your plan. Although investing is always referred to as long- term, it is rarely dealt with as such by investors, the media, or financial advisors. Never change direction frequently, and always make gradual rather than drastic adjustments. Short-term market value movements must not be compared with un-portfolio related indices and averages. There is no index that compares with your portfolio, and calendar sub-divisions have no relationship whatever to market, interest rate, or economic cycles.
4. Never fall in love with a security, particularly when the company was once your employer. It’s alarming how often accounting and other professionals refuse to fix the resultant single-issue portfolios. Aside from the love issue, this becomes an unwilling-to-pay-the-taxes problem that often brings the unrealized gain to the Schedule D as a realized loss. No profit, in either class of securities, should ever go unrealized. A target profit must be established as part of your plan.
5. Prevent “analysis paralysis” from short-circuiting your decision-making powers. An overdose of information will cause confusion, hindsight, and an inability to distinguish between research and sales materials— quite often the same document. A somewhat narrow focus on information that supports a logical and well-documented investment strategy will be more productive in the long run. Avoid future predictors.
6. Burn, delete, toss out the window any short cuts or gimmicks that are supposed to provide instant stock picking success with minimum effort. Don’t allow your portfolio to become a hodgepodge of mutual funds, index ETFs, partnerships, pennies, hedges, shorts, strips, metals, grains, options, currencies, etc. Consumers’ obsession with products underlines how Wall Street has made it impossible for financial professionals to survive without them. Remember: consumers buy products; investors select securities.
7. Attend a workshop on interest rate expectation (IRE) sensitive securities and learn how to deal appropriately with changes in their market value— in either direction. The income portion of your portfolio must be looked at separately from the growth portion. Bottom line market value changes must be expected and understood, not reacted to with either fear or greed. Fixed income does not mean fixed price. Few investors ever realize (in either sense) the full power of this portion of their portfolio.
8. Ignore Mother Nature’s evil twin daughters, speculation and pessimism. They’ll con you into buying at market peaks and panicking when prices fall, ignoring the cyclical opportunities provided by Momma. Never buy at all time high prices or overload the portfolio with current story stocks. Buy good companies, little by little, at lower prices and avoid the typical investor’s buy high, sell low frustration.
9. Step away from calendar year, market value thinking. Most investment errors involve unrealistic time horizon, and/or “apples to oranges” performance comparisons. The get rich slowly path is a more reliable investment road that Wall Street has allowed to become overgrown, if not abandoned. Portfolio growth is rarely a straight-up arrow and short-term comparisons with unrelated indices, averages or strategies simply produce detours that speed progress away from original portfolio goals.
10. Avoid the cheap, the easy, the confusing, the most popular, the future knowing, and the one-size-fits-all. There are no freebies or sure things on Wall Street, and the further you stray from conventional stocks and bonds, the more risk you are adding to your portfolio. When cheap is an investor’s primary concern, what he gets will generally be worth the price.
Compounding the problems that investors face managing their investment portfolios is the sensationalism that the media brings to the process. Step away from calendar year, market value thinking. Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques.
Do most individual investors have difficulty in an environment that encourages instant gratification, supports all forms of speculation, and gets off on shortsighted reports, reactions, and achievements? Yup.
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”