1. Not having clear investment goals
The adage, “If you don’t know where you are going, you will probably end up somewhere else,” is as true of investing as anything else. Everything from the investment plan to the strategies used, the portfolio design, and even the individual securities can be configured with your life objectives in mind. Too many investors focus on the latest investment fad or on maximizing short-term investment return instead of designing an investment portfolio that has a high probability of achieving their long-term investment objectives.
2. Having unrealistic expectations or using someone else’s expectations
Investing for the long-term involves creating a well-diversified portfolio designed to provide you with the appropriate levels of risk and return under a variety of market scenarios. But even after designing the right portfolio, no one can predict or control what returns the market will actually provide. It is important not to expect too much and to be careful when figuring out what to expect. Nobody can tell you what a reasonable rate of return is without having an understanding of you, your goals, and your current investments.
3. Failing to diversify enough
The only way to create a portfolio that has the potential to provide appropriate levels of risk and return in various market scenarios is adequate diversification. Often investors think they can maximize returns by taking a large investment exposure in one security or sector. But when the market moves against such a concentrated position, it can be disastrous.
4. Focusing on the wrong kind of performance
There are two timeframes that are important to keep in mind: the short-term and everything else. If you are a long-term investor, speculating on performance in the short-term can be a recipe for disaster because it can make you second guess your strategy and motivate short-term portfolio modifications. But looking past near term chatter to the factors that drive long-term performance is a worthy undertaking. If you find yourself looking short term, refocus.
5. Buying high and selling low
The fundamental principle of investing is to buy low and sell high, so why do so many investors do the opposite? Instead of rational decision making, many investment decisions are motivated by fear or greed. As Warren Buffett says, “be fearful when others are greedy, and be greedy when others are fearful.” A focus on near-term returns leads to investing in the latest investment craze or fad or investing in the assets or investment strategies that were effective in the near past. Either way, once an investment has become popular and gained the public’s attention, it becomes more difficult to have an edge in determining its value.
6. Not knowing what you are invested in
Far too many investors don’t know what they are invested in. Not knowing what the specific risks of the investment are and not understanding how it does or doesn’t fit into their portfolio. Every investment should have a reason why it’s in your portfolio. Ensure that every investment in your portfolio has a reason to be there.
7. Trading too much and too often
When investing, patience is a virtue. Often it takes time to gain the ultimate benefits of an investment and asset allocation strategy. Continued modification of investment tactics and portfolio composition can not only reduce returns through greater transaction fees, it can also result in taking unanticipated and uncompensated risks. Use the impulse to reconfigure your investment portfolio as a prompt to learn more about the assets you hold instead of as a push to trade.
8. Reacting to the media
There are plenty of 24-hour news channels that make money by showing “tradable” information. It is foolish to try to keep up. The key is to parse valuable information out of all the noise. Successful and seasoned investors gather information from several independent sources and conduct their own proprietary research and analysis. Using the news as a sole source of investment analysis is a common investor mistake because by the time the information has become public, it has already been factored into market pricing.
9. Working with the wrong adviser
An investment adviser should be your partner in helping you achieve your financial goals. The ideal financial professional and financial service provider not only has the ability to solve your problems but shares a similar philosophy about investing and even life in general. The benefits of taking extra time to find the right adviser far outweigh the comfort of making a quick decision. Ask for references and check their work on the investments that they recommend. The worst case is that you trade an afternoon of effort for sleeping better at night.
10. Trying to be a market timing genius
Market timing is next to impossible. For people who are not well trained, trying to make a well-timed call can be their undoing. An investor that was out of the market during the top 10 trading days for the S&P 500 Index from 1993 to 2013 would have achieved a 5.4% annualized return instead of 9.2% by staying invested. This difference suggests that investors are better off contributing consistently to their investment portfolio rather than trying to trade in and out in an attempt to time the market.
11. Not controlling what you can
People like to say that they can’t tell the future, but they neglect to mention that you can take action to shape it. You can’t control what the market will bear, but you can save more money! Continually investing capital over time can have as much influence on wealth accumulation as the return on investment. It is the surest way to increase the probability of reaching your financial goals.
12. Taking too much, too little, or the wrong risk
Investing involves taking some level of risk in exchange for potential reward. Taking too much risk can lead to large variations in investment performance that may be outside your comfort zone. Taking too little risk can result in returns too low to achieve your financial goals. Make sure that you know your financial and emotional ability to take risks and recognize the investment risks you are taking.
13. Paying too much in fees and expenses
Investing in a high-cost fund or paying too much in advisory fees is a common mistake because even a small increase in fees can have a significant effect on wealth over the long term. Before opening an account, be aware of the potential cost of every investment decision. For example: make sure you not paying investing in mutual funds that front-loaded sales charges or 12b-1 fees. Look for funds that have fees that make sense and make sure you are receiving value for the advisory fees you are paying.
14. Not reviewing investments regularly
If you are invested in a diversified portfolio, there is an excellent chance that some things will go up while others go down. At the end of a quarter or a year, the portfolio you built with careful planning will start to look quite different. Check in regularly (at a minimum once a year) to make sure that your investments still make sense for your situation. It is shocking how many people have no idea how their investments have performed. Even if they know the headline result or how a couple of their stocks have done, they rarely know how they have performed in the context of their portfolio. Even that is not enough; you have to relate the performance of your overall portfolio to your plan to see if you are on track after accounting for costs and inflation. Don’t neglect this. How else will you know how you are doing?
15. Letting emotions or biases get in the way
Investing brings up significant emotional issues that can impede decision making. Understand how biases affect your decisions, are you over confident, do you recognize your blind spots? A good adviser will be able to help you construct a plan that works no matter what the answers to these questions are.
16. Neglecting to start or continue
Individuals often fail to begin an investment program simply because they lack basic knowledge of where or how to start. Likewise, periods of inactivity are frequently the result of lethargy or discouragement over previous investment losses. Investment management is a discipline that is not overly complex, but requires continual effort and analysis in order to be successful.
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Paul R. Rossi, CFA