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
performance:
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 own.
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 and 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.
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Your Bio: Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979 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"
copyright: YES
