Title:

Ten Common Investment Errors: Stocks, Bonds, & Management

 

Word Count:

961

 

Summary:

Losing money on an investment may not be the result of a mistake, and not all mistakes result in monetary

losses. Compounding the problems that investors have managing their investment portfolios is the

sideshowesque sensationalism that the media brings to the process. Avoid these ten common errors to

improve your performance:

 

Keywords:

investment,investment guru,stock market,money,asset allocation,diversification,Wall

Street,stocks,equities,fixed income,income investing,investment plan,commissions,taxes,Working Capital,

 

Article Body:

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, 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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