“On the fifth day of Christmas my broker gave to me, FIVE…DEADLY…INVESTOR MISTAKES!”
These mistakes are crucial when investing, and all too often people make them.
- Too much money invested in one stock: Do you have company stock? What about a stock that was given to you as an inheritance or gift? Well, have you ever heard of a company called Enron? How about Worldcom, Bear Sterns or even Lehman Brothers? These are all great examples of why we DO NOT hold a large portion of our portfolios in any one stock. When you start including more assets in a portfolio, depending on it’s relationship (correlation) with the other assets in the portfolio, the risk (volatility) will decrease.
- Mistaking “activity” for control: Buying and selling often feels good and productive, but in reality is often counterproductive. It is similar to going to a slot machine and pulling the arm. You feel like you have more control over the situation, but statistically it does not make a bit a difference whether you pull or someone else does.
- Mistaking a lot of “stuff” for true diversification: true diversification is not holding the best performing funds or the best asset class for the year. If you want TRUE diversification, you are going to have assets classes that have performed poorly over the last five to ten years. It may seem illogical, but do you know what the future holds?
- “I’ll stop when I get even”: enough said.
- Gambling with your money: Some investors say, “I enjoy speculating by buying stocks or watching the market.” If you are going to gamble, do it in Vegas. Don’t do it with the wealth you need for your life goals and dreams. Don’t gamble away your future. This includes:
a. Stock picking: The idea that you can pick the right stock at the right time. 91% of a portfolio’s return is due to asset allocation, not stock selection. “Determinants of Portfolio Performance II: An Update” Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal 51 (May-June), no. 1: 40-48
b. Market Timing: The idea that you can get into the stock market before the huge run-up and out before it tanks.
c. Track record investing: Just because a mutual fund manager may have beaten his relative index 1, 3, or even 5 years does not guarantee that he will do so in the future.
Philip A. Guske