The “Big Mistakes” are those investing errors that prevent individual investors from achieving the returns that their investments are capable of. In other words, these are the mistakes that prevent an Investor from achieving their underlying Investment returns.In our opinion, the “Big Mistakes” of investing are, in no particular order:1.Asset Allocation Mismatch. Having an asset allocation that is inconsistent with the investor’s tolerance for risk or volatility. For example, an investor who can’t stomach a 40% decline in their portfolio, but is invested 100% in the US equity market.2.Under-Diversification. Having a portfolio that is not diversified enough to reduce single-stock or sector risks. This can be as obvious as holding too much employer stock, or as transparent as holding multiple mutual funds that have a large overlap in their underlying portfolios.3.Over-Diversification. Having a portfolio that is so diversified that managing it becomes a nightmare, so it simply isn’t managed. This can also mask Under-Diversification (see above), due to the phenomena of overlap.4.Panic Selling. Selling at the bottom of the market, or what is perceived as the bottom of the market, hoping to buy back in as the market turns up. Generally caused by an Asset Allocation Mismatch (see above).5.Hot-Tip Buying. Buying an investment that “can’t lose” or sounds like it will be in demand.6.Portfolio Ghosts. Holding accounts built by great ideas of the past and during different life situations. Often from 401(k) or 403(b) accounts of past employers.7.Market Timing. Selling and buying investments at arbitrarily-set levels trying to limit loses and capture upside gains (keyword: arbitrarily-set, which they always are). Although it sounds good, the problem with market timing is that it does not work. Period, end of story.8.Overconfidence. Loosing all sense of principal risk and “betting the farm” on the market. Generally occurring in the heat of a prolonged market upswing, the investors’ hope is to finally make the one “big score.” Frequently, all other prudent rules of investing are ignored during these periods (e.g., asset allocation, diversification). Frequently called market “euphoria.”9.Speculation as an investment. Ignoring all financial warning signs and investing anyway, usually in narrowly-defined economic sectors or individual companies. Sometimes explained away by claiming “this time its different.”10.Ignoring Inflation. Ignoring the corrosive effect of inflation on the value of money by moving a portfolio entirely into “safe” fixed yield investments (e.g., bonds). Portfolios often experience a “slow death” of losing purchasing power using this strategy.
The “Big Mistakes” are those investing errors that prevent individual investors from achieving the
returns that their investments are capable of. In other words, these are the mistakes that prevent an
Investor from achieving their underlying Investment returns.
In our opinion, the “Big Mistakes” of investing are, in no particular order:
1.
Asset Allocation Mismatch. Having an asset allocation that is inconsistent with the investor’s
tolerance for risk or volatility. For example, an investor who can’t stomach a 40% decline in their
portfolio, but is invested 100% in the US equity market.
2.
Under-Diversification. Having a portfolio that is not diversified enough to reduce single-stock
or sector risks. This can be as obvious as holding too much employer stock, or as transparent as
holding multiple mutual funds that have a large overlap in their underlying portfolios.
3.
Over-Diversification. Having a portfolio that is so diversified that managing it becomes a
nightmare, so it simply isn’t managed. This can also mask Under-Diversification (see above),
due to the phenomena of overlap.
4.
Panic Selling. Selling at the bottom of the market, or what is perceived as the bottom of the
market, hoping to buy back in as the market turns up. Generally caused by an Asset Allocation
Mismatch (see above).
5.
Hot-Tip Buying. Buying an investment that “can’t lose” or sounds like it will be in demand.
6.
Portfolio Ghosts. Holding accounts built by great ideas of the past and during different life
situations. Often from 401(k) or 403(b) accounts of past employers.
7.
Market Timing. Selling and buying investments at arbitrarily-set levels trying to limit loses and
capture upside gains (keyword: arbitrarily-set, which they always are). Although it sounds good,
the problem with market timing is that it does not work. Period, end of story.
8.
Overconfidence. Loosing all sense of principal risk and “betting the farm” on the market.
Generally occurring in the heat of a prolonged market upswing, the investors’ hope is to finally
make the one “big score.” Frequently, all other prudent rules of investing are ignored during
these periods (e.g., asset allocation, diversification). Frequently called market “euphoria.”
9.
Speculation as an investment. Ignoring all financial warning signs and investing anyway,
usually in narrowly-defined economic sectors or individual companies. Sometimes explained
away by claiming “this time its different.”
10.
Ignoring Inflation. Ignoring the corrosive effect of inflation on the value of money by moving a
portfolio entirely into “safe” fixed yield investments (e.g., bonds). Portfolios often experience a
“slow death” of losing purchasing power using this strategy.
