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Ten Common Investment Errors: Stocks, Bonds, & Management
By:Steve Selengut
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.
Steve Selengut
3912 Betsy Kerrison Pkwy
Kiawah Island, SC 29455
843-245-0494
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"
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