Three Common Investing Mistakes To Avoid
By Roy Bodinus
Published: March 21, 2008
We all have built-in emotions that can limit our ability to think clearly. Avoiding these common mistakes will increase your ability to achieve your investment goals.
No guarantees of continuance
We see some variation of this disclaimer, 'Past performance is not necessarily indicative of future results.' in just about every investment related advertisement, but we all too often ignore it. Regulatory bodies require investment firms and mutual fund companies to use that language for a reason - because it's true. While useful in some situations, the over-reliance on the past to assess the future is a dangerous strategy that can lead to buying high and selling low.
The problem, of course, is that yesterday doesn't always tell you what tomorrow will bring. In other words, looking at your statement to see what funds performed best last quarter or last year and moving assets out of your current holdings to those that performed the best, may result in your account being late to the party. In most cases, you would need to have been invested in the 'hot' funds prior to their strong performance in order to benefit.
I've seen investors making this mistake time after time over the years. It is our natural tendency to want a piece of what is making someone else so much money. Maintaining a disciplined strategy to gain exposure to many asset classes over the long term will take the guesswork out of deciding on your appropriate allocation and chasing the hot funds.
Chasing returns is without a doubt the most common mistake I've seen do-it-yourself investors make throughout my career. Purchasing funds that are already at or near their top and selling them when they are poised for a recovery will devastate long-term performance.
We're not all experts
Have you heard the story about how if you ask a room full of people to raise their hand if they are an above average driver that about 85% will raise their hand (of course, we know that is statistically impossible). Many investors are similar in that they think they are more knowledgeable than the next guy, because they heard someone on TV last night comment that utility stocks pay a nice dividend. Trust me, I'm not a pessimist, but there is about as good a chance that I will play for the New York Yankees next year as there is that you will find the next Microsoft before the professionals on Wall Street do.
Overconfident investors tend to trade frequently, because they think their knowledge is superior to the person on the other side of the trade. Frequent trading can be hazardous to your wealth. Rather than making bets on individual stocks that you hear the news anchor reference in the business report, investors are better advised to resist the temptation of acting on such information and stay focused on a long term asset allocation that offers the diversification that is consistent with their tolerance for risk and will aid them in meeting their goals.
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