Investment mistakes happen for a multitude of
reasons, including the fact that decisions are made under conditions of
uncertainty that are irresponsibly downplayed by market gurus and
institutional spokespersons. Losing money on an investment may not be
the result of a mistake, and not all mistakes result in monetary losses.
But errors occur when judgment is unduly influenced by emotions, when the
basic principles of investing are misunderstood, and when misconceptions
exist about how securities react to varying economic, political, and
hysterical circumstances. Avoid these ten common errors to improve your
1. Investment decisions should be made
within a clearly defined Investment Plan. Investing is a goal-orientated
activity that should include considerations of time, risk-tolerance, and
future income… think about where you are going before you start moving in
what may be 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. The distinction between Asset Allocation
and Diversification is often clouded. Asset Allocation is the planned
division of the portfolio between Equity and Income securities.
Diversification is a risk minimization strategy used to assure that the
size of individual portfolio positions does not become excessive in terms
of various measurements. Neither are "hedges" against anything or Market
Timing devices. Neither can be done with Mutual Funds or within a single
Mutual Fund. Both are handled most easily using Cost Basis analysis as
defined in the Working Capital Model.
3. Investors become bored with their Plan
too quickly, change direction too frequently, and make drastic rather
than gradual adjustments. Although investing is always referred to as
"long term", it is rarely dealt with as such by investors who would be
hard pressed to explain simple peak-to-peak analysis. Short-term Market
Value movements are routinely compared with various un-portfolio related
indices and averages to evaluate performance. There is no index that
compares with your portfolio, and calendar divisions have no relationship
whatever to market or interest rate cycles.
4. Investors tend to fall in love with
securities that rise in price and forget to take profits, particularly
when the company was once their employer. It's alarming how often
accounting and other professionals refuse to fix these 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. Diversification rules, like Mother Nature, must not
be messed with.
5. Investors often overdose on information,
causing a constant state of "analysis paralysis". Such investors are
likely to be confused and tend to become hindsightful and indecisive.
Neither portends well for the portfolio. Compounding this issue is the
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. But do avoid future predictors.
6. Investors are constantly in search of a
short cut or gimmick that will provide instant success with minimum
effort. Consequently, they initiate a feeding frenzy for every new,
product and service that the Institutions produce. Their portfolios
become a hodgepodge of Mutual Funds, iShares, Index Funds, Partnerships,
Penny Stocks, Hedge Funds, Funds of Funds, Commodities, Options, etc.
This obsession with Product underlines how Wall Street has made it
impossible for financial professionals to survive without them. Remember:
Consumers buy products; Investors select securities.
7. Investors just don't understand the
nature of Interest Rate Sensitive Securities and can't deal appropriately
with changes in Market Value… in either direction. Operationally, the
income portion of a portfolio must be looked at separately from the
growth portion. A simple assessment of bottom line Market Value for
structural and/or directional decision-making is one of the most
far-reaching errors that investors make. Fixed Income must not connote Fixed
Value and most investors rarely experience the full benefit of this
portion of their portfolio.
8. Many investors either ignore or discount
the cyclical nature of the investment markets and wind up buying the most
popular securities/sectors/funds at their highest ever prices.
Illogically, they interpret a current trend in such areas as a new
dynamic and tend to overdo their involvement. At the same time, they
quickly abandon whatever their previous hot spot happened to be, not
realizing that they are creating a Buy High, Sell Low cycle all their
9. Many investment errors will involve some
form of unrealistic time horizon, or Apples to Oranges form of
performance comparison. Somehow, somewhere, the get rich slowly path to
investment success has become overgrown and abandoned. Successful
portfolio development is rarely a straight up arrow and comparisons with
dissimilar products, commodities, or strategies simply produce detours
that speed progress away from original portfolio goals.
10. .The "cheaper is better" mentality weakens
decision making capabilities, leads investors to dangerous assumptions
and short cuts that only appear to be effective. Do discount brokers seek
"best execution"? Can new issue preferred stocks be purchased without
cost? Is a no load fund a freebie? Is a WRAP Account individually
managed? When cheap is an investor's primary concern, what he gets will
generally be worth the price.
Compounding the problems that investors have
managing their investment portfolios is the sideshowesque sensationalism
that the media brings to the process. Investing has become a competitive
event for service providers and investors alike. This development alone
will lead many of you to the self-destructive decision making errors that
are described above. Investing is a personal project where
individual/family goals and objectives must dictate portfolio structure,
management strategy, and performance evaluation techniques. Is it
difficult to manage a portfolio in an environment that encourages instant
gratification, supports all forms of "uncaveated" speculation, and that
rewards short term and shortsighted reports, reactions, and achievements?
Yup, it sure is.