Greatest Investing Mistakes
The 6, NO. The 7 Greatest
(and portfolio-destroying)
Investing Mistakes and
How to avoid them!
If you are reading this, you are successful, and affluent. You made (mostly) good choices. Of course, we all make mistakes. But success in most things, as most of you already know, means being consistent; and it means avoiding the BIG mistakes. Or, at least, making as few as possible.
These 8 Big Mistakes are costly. Very Costly.
Successful, good tennis players do not necessarily hit the greatest number of terrific shots. They usually hit the fewest poor, really terrible shots. The same goes for golfers. Is that the moral of the story of the tortoise and the hare; the grasshopper and the ant; the scorpion and the frog? Maybe.
What about fighter pilots? Doctors? Surgeons? Spouses? Politicians? The list is endless:
“First Do No Harm”.
(This is the first tenant of the physicians’ Hippocratic Oath?)
It also is the first tenant of the Financial PhysicianTM.
First Do No Harm. Don’t rush. Be careful. Be prudent. Be consistent. Avoid the BIG MISTAKES. Make and Keep more of your money. Achieve consistent, reliable above average, Healthy ReturnsTM.
The BIG Mistakes are fatal to superior or even decent real lifetime investment returns. Giving great advice is only half the battle. We cannot help people who will not be coached. People, who especially in critical moments, refuse to be coached. Refuse to be helped.
A little nurturing here: It may not be entirely your own fault. The media, the industry, your “advisor” — (your “advisor” is all too often simply a salesperson of “investment product” and not held to the standards that put your interests first. If you are not sure, then you are certainly not working with an investment Coach) — most probably share some of the blame.
Then there are investors who don’t know (even though they should know) what else to do…
How many of us are overweight? But, how many of us don’t know what it takes to lose weight? And yet, so many of us refuse to do what we know is necessary to lose that weight. Of course, it would be so much easier with a Physician or a Coach by our side helping us to focus on losing weight. Restoring our health.
Just like it is so much easier to achieve or restore your Financial HealthTM or to realize Healthy Investment ReturnsTM with a Financial PhysicianTM (or Investment Coach) to help us avoid the Costly and BIG Investment Mistakes.
“To keep us on track. The right track.”
None of these mistakes is more obvious or dangerous than any other, though some are more common. The worst of these, the most costly of these, the most perilous of these 9 Great BIG Mistakes is the one you wind up making just at the most critical time.
And, many of these can be made simultaneously. Unfortunately, most investors usually manage to do just that.
Just because you are actively engaged in pursuing one mistake, does not in any way immunize you against making any of the others. In fact, most likely, you are busy with multiple, costly, frustrating errors. All at the worst time!
But, without question, by far the most perilous of the BIG Mistakes, is always the one that you make just at the wrong moment. (Is there ever a good time to make investing mistakes?)
You would stop this pain, this foolishness — if you knew you were doing it; if you knew of an alternative; if someone could Coach you.
Some Mistakes may be more common than others. I do not list them here in any particular order. So don’t look to weigh, measure or calibrate them.
Moreover, some of the Mistakes are generally made in repeating patterns that ebb and flow. The most obvious of these knee-jerk reactions — euphoria too often gives way to panic. Or buying and holding (the wrong things in the wrong ratio’s) gives way to market timing by going “tactical asset allocation” or to cash. Or, …you get the picture.
Does any of this sound familiar?
I know you realize that the names or descriptive terms of the Great Mistakes (and their numbered order) isn’t the critical issue. The critical issue — is knowing and coaching and training and educating you to overcome the base and instinctive human reactions and behaviors which, left unchecked, will
“Blow the best portfolio ever devised –
to kingdom come”.
Again and not for the last time: it doesn’t matter so much what the portfolio is doing (what your asset allocations are, what you have populated those allocations with); it really only matters what you are doing with your investment portfolio.
So, here they are –
the Nine Ten Great BIG Investing Mistakes
that even “smart- money” investors make:
…Stick with me, before I divulge these secrets…Did you hear about or see the story of the “smart money”, the
Ivy-League “GENIUSES” that LOST over 30% or $20 BILLION
in endowment money (read not theirs, but Other Peoples’ Money – probably your money) during this most recent market crash? Of course you did. And they were paid very well too. It takes a genius after all to lose that much money.
What about the wealthy widow whose net worth devalued by two thirds? Too sad! And wholly unavoidable. Financial MalpracticeTM. Call me to learn about “Pension Rescue”.
What about the financial wizard (partner of the famed British Pound Hedge Fund operator) who lost One Billion Dollars? Or the Nobel Prize winners who BLEW UP not one but TWO Hedge Funds in 10 years (does the name John Meriweather ring a bell?)? Financial CancerTM.
The Ten Eleven Great BIG Investing Mistakes:
- 1. PAYING TOO MUCH IN FEES, COSTS, AND TAXES.
Are you in an actively managed mutual fund, hedge fund, private equity fund, or separately managed account? Probably.
Do you know what your annual turnover is for the stocks they own? Probably not. How would you? The average annual turnover exceeds 100%. That’s right. You are unwittingly buying and selling the same stocks every year.
This generates a fee for the managers that you pay. This also costs you something called the “Bid-Ask Spread”. The best analogy is to compare to the transaction to buying a new car.
You pay $50,000 for a new car. The minute you drive it off the lot, it is only worth $40,000. That is the bid-ask spread. Or you sell your used vehicle to the dealer for $20,000 who turns around and sells the same vehicle in a matter of days for $26,000. That too, is the bid-ask spread.
And this applies to buying and selling stocks. The smaller the stock, the bigger the spread. The smaller the geographic market the bigger the spread. The smaller the industry, the bigger the spread.
And bonds have some of the highest spreads. So it does you very little good to own individual bonds if you trade them. And it does you little good to keep them — because of the taxes you pay on the income. I could go on. Do you know how much overlap there is with these funds owning the same issues?
This turnover also leads to short term gains. If you are lucky. These are then taxed at ordinary income rates.
- 2. CONFUSING MANAGEMENT STYLES WITH DIVERSIFICATION
Ah, the “sophisticated” investor. The definition itself is highly misleading. According to the regulatory agencies, what makes one sophisticated is an annual income above $250,000 and a net-worth above $1 Million.
That is simply the lower end of the “middle class millionaire.” (Of course, now that we have had the financial melt-down, the over-leveraged near millionaire is either extinct or broke.) But this mass millionaire hardly had an opportunity to make this BIG Mistake.
No. This one is the exclusive province of the truly sophisticated and wealthy. And the endowments; the foundations; the pension funds of cities, states, corporations, and unions.
Confusing management styles (of various hedge funds, private equity funds, venture capital funds, and the pedestrian separately managed accounts) of these so-called “alternative investments” with diversification of portfolio was almost universal.
But these “alternatives” are merely a management style. Usually, but not always, a style of equity investing. That is – stocks. Sometimes it is a style of debt (bond or fixed income) investing.
They are not alternatives at all. They often are glorified gambling. They utilize leverage, and/or over-weighting of a particular direction of movement, or stock, or industry, or country, or region. To make a bet. Let’s find some fund of funds so we can pool our bet; spread our risk; and hope to find the one or two that go to the moon. Last time I checked, hope was not a solid business strategy.
- 3. SEEKING ALPHA.
This one is almost universal. Alpha is industry jargon for beating the markets. A fool’s errand. Nobody has been able to identify consistently and in advance which manager, or stock or industry, or asset class, or region will out-perform any benchmark or index, commercial or otherwise.
Yet everyone has fallen victim to this mistake. I am not talking about investing actively in your own business, or even in someone else’s; where you have skin in the game, and some control over its management and direction. Rather, everyone at one time or another has invested as a passive limited shareholder in something that might out-perform. And the siren’s song, is that some do. Sometimes.
So we persist in following that unrealistic road. On balance, I have yet to meet any investor who has experienced this as a successful, long-term, strategy. Even the famed Warren Buffet has lost his halo and wings, and fallen back to earth.
- 4. POOR, OR BAD, OR WRONG, OR NO DIVERSIFICATION.
First let’s define diversification and its purpose. It is a means of selling sunglasses on the sunny days and umbrellas on the rainy days. Not every day is rainy or sunny. So, we try to make money in all circumstances. On the rainy days when no sunglasses sell, we can still sell the umbrellas.
And perhaps even more importantly, we can hedge our risks through diversification. We try to smooth out the bumps on the way up. This may cost us some money because our umbrellas do not sell on the sunny days. But, we willingly take on this cost as insurance.
So now we have to define our sunglasses and umbrellas. Just as a raincoat is not going to provide appropriate protection on sunny days, the raincoat does not really diversify our holdings. It merely extends our rainy day business, while it does nothing for the snow days. For that we need a snowplow. That is diversification of asset classes.
An asset class is not a “style box”. An asset class must meet the three following criteria:
- It must be compositionally unique (not like the umbrella and raincoat)
- It must be compositionally stable (the raincoat cannot morph into a snowplow)
- It must have low correlation; that is it must go up when the other asset classes go down (the raincoat and the umbrella move in unison; the sunglasses and the raincoat or the sunglasses and the umbrella move in opposite directions).
Some people are lumpers; and some are splitters. I am a lumper. The following are asset classes: 1– debt (bonds, fixed income, convertibles, preferred shares); 2 — equity (stocks; and there are now more equity mutual funds than there stocks); 3 –cash; and 4 –commodities (real estate, oil, gold, etc.). Because they meet the criteria above.
Some have successfully argued that insurance products are a fifth asset class. Let’s agree to leave that one alone for now.
I see over-diversification (too many raincoats and umbrellas) way too often; and it’s really a factor of following too much bad “advice”. The advice of the television pundits and their interviewees, and the financial press.
The Investor (yes, even the so-called “sophisticated” investor) making periodic contributions into the brokerage account or retirement fund; depositing money with the then top-performing manager based on the recommendation of the “genius advisor” (just what exactly makes this person have information or abilities that exceed any one else’s, for any extended period of time??) featured in Money Magazine, or Fortune, or Forbes, or Barron’s or The Wall Street Journal; or on CNBC or Fox Business News; or, …
Ten years later, you probably own a mix of 10 to 30 mutual funds. But, like the Academy Awards, nobody wins twice in a row. Let alone ten times in a row. Or even most of the time over that ten-year period.
Worse, now you probably have way too much of exactly the same stocks. Only in different funds. (Not to mention the additional expenses). Because, if there is a stock that performs well, the fund manager will “window-dress” the portfolio to make it appear that the fund and the manager did not miss out on this stock. And too often that stock is purchased after it has gone up in price. I call that following the herd. So you wind up with a distorted, perverted index fund.
By having neither an Investment Policy Statement, nor an investing philosophy, nor a strategy for carrying it out you are now the not-too-proud owner of the world’s largest, least efficient, most expensive index fund-with gaps, redundancies, unnecessary taxation, and fee inefficiencies that would make you sick – if you were even remotely aware of these.
By whatever method or system or device you get there, the over-diversified investor, in the act of owning everything, ends up owning nothing useful or effective.
Under-diversification also is HUGE. This is where extremely large segments of investors try to do the same things in the same way at the same time. When your lawn guy tells you to invest in Pets.com, Priceline, or residential housing, you can bet we are close to being under-diversified.
Concentrating, rather than spreading our risk. The erroneous thinking goes something like this: “Don’t be caught without owning lots of this asset class. Everyone is making boatloads of money but me. Under-diversify now.”
Oops. Then, inevitably the sky opens, the rains fall, the 100 year flood arrives, the boom busts, bubble bursts, and at the bottom the investors’ portfolios again dumb down to crowd logic, direct democracy, market overshoot, knee-jerk reaction, whatever you want to call it.
“Panic! Sell! This time is different! Stocks will never stop going down. But if by some fluke or miracle they do turn upwards, they will never again in our lifetimes earn their way back to where they were. The sky is faIling. Sell at any price. The era of American dominance and the American dream is over. Just like Rome fell. Capitalism is an abject failure.”
Balderdash. Counter-factual. Non-sense. It will happen. Stocks will come back. Equities always come back. I don’t know when nor how. Only that it will. Though, it may not happen fast enough for our comfort.
So investors escape in droves into bonds, and then will get doubly whacked. Just in time for governments to bail us out with inflationary policies that will raise interest rates, and devalue our bonds.
Classic buy high and sell low. Both times. Both asset classes. Over and over again. Painful and very Costly. The cycle goes unbroken, according to the song. Sell equities at the bottom to buy bonds at their peak, just before the cycle turns again. Then wait for equities to rise before buying them again.
Thus the average investor under-performs the markets by an astounding amount. A devastating amount. And we are all average investors eventually. By definition. Unless we avoid this mistake with the help of an Investment Coach.
Enron had a better way to finance and market and distribute power. Poof. An accounting figment. More like a nightmare. It has disappeared. Just like the accounting firm Arthur Anderson. Gone. GM is now owned by the folks who run TSA and the IRS and the USPS —paragons each of efficiency and effectiveness. Beautiful. You won’t even buy the cars let alone the stock.
Johns-Manville, the blue chip company at one time insulated every home and office in America, until we found out its insulation had asbestos (and the trial lawyers ginned-up, phony, fraudulent radiologists to “find” disease).
And the silicone breast implant manufacturers, the DDT manufacturers, the vaccine manufacturers: toast. WR Grace: the same. International Harvester: History. The mighty Penn Central Railroad, and the pioneering global airline Pan Am, whose stock actually went to zero twice.
What about TWA? Forget about Merrill Lynch, AIG, Lehman Brothers—here on Friday, nowhere to be found on Sunday; and Bear Stearns, the fifth largest investment banking firm in this country until, over the course of a week, it disappeared.
The outstanding leaders of the first great age of computers: Prime Computer, Burroughs, Control Data, Wang Laboratories. Blue chips all. Gone — all completely and utterly gone.
How much more of this would you like?
The next crash is just around the corner. Over-concentration of sunglasses will not help you on rainy days. Neither will too many umbrellas protect your eyes from the sun. Diversify appropriately for your risk tolerance, your financial needs and goals, your cash flow requirements, and your time horizons.
An investment coach will never let you invest so much in any one theme or issue that you make a killing. That is good, because then you will not invest so much that you get killed, either.
4. FEAR OF MISSING THE TRAIN.
Sometimes this manifests as euphoria. The complete loss of a true sense of danger. Like when you were a teenager. This may lead to under-diversification too. But let’s stay focused here.
When the euphoria hits you, you no longer fear (or even accept the possibility of danger) principal loss. How could you lose money? That other investor is not as diligent or smart as you.
Your only concern is that the other investor, or somebody, somewhere else owns funds or stocks that are going up more than yours. Indeed, many of us can still remember the
“Whine of ‘99; “Everybody’s getting rich but me!”
An investor who realized a 29% return in 1999, in a properly risk-managed and diversified, high quality investment portfolio, is reported to have sued his investment advisor. Because the investor’s peers (with whom he played golf) boasted returns in excess of 70%.
Sounds unbelievable. Not the suing part. But, the overall portfolio returns exceeding 70% part. What high-risk, poorly balanced portfolio was that? And who was the bad-actor that enabled that portfolio?
Even though, in early in 2000, as the market imploded, the suit evaporated like dew in Arizona…You might ask yourself: how would you have felt and reacted to learn that your portfolio “under-performed”?
All new booms end in busts. It is difficult to know when we are in that bubble until it bursts. Remember, this time is not different. Repeat after me:
“This time is NEVER different”.
Business cycles, market cycles, the laws of economics, or physics, or human nature have never been, nor ever will be, repealed. The law of unintended consequences will always persist. Like the cockroach. As will inflation, and taxation.
So stand your ground. Especially in euphoric times, be willing to look stupid. It will make you look smart – and it will make you rich – in the bust years.
- 5. PANIC.
Many experienced investors (that is those who have invested over decades and through big ugly bear markets) believe that the biggest bear markets follow and simply correct the biggest bull markets.
For example: 1915-1928 was followed by 1929-1952; 1954-1966 was followed by 1967-1979; 1982-2000 was foIlowed by 2000-2002; and 2003-2007 was followed by 2008-2009. We could look even further back, but you get the idea.
Nothing grows to the sky.
What comes up must come down.
There is a old German proverb that “nothing is eaten as hot as it’s cooked.” Not everything is as it seems. It is not as good as we hope. It is rarely as bad as we fear.
Does that make any sense?
There is an inverse and close relationship between the height of the euphoria at the top of a big bull market and the depth of their panic-induced capitulation at the bottom of the bear.
That explains why the very same people who drank every drop from the “fountain of perpetual growth and prosperity” become convinced, beyond a doubt, at or near generational low’s, that the world and business and profit and human nature and drive and ambition — is coming to an end. That stocks are dead.
You have people who say they’d “rather miss the train than be hit by the train.”
They forget about the biblical Seven Years of Feast is always followed by Seven Years of Famine. Facts of life. Laws of Nature. Cycles. Immutable. History may not repeat itself, but it rhymes.
You can manage tomorrow’s panic by managing today’s euphoria. But, nothing stops the markets from dropping another 40% — this year. We should expect it. And we should be prepared for it. If you cannot invest for the long-term (over 20 years) – and just about every investor does invest for longer than 20 years – you should allocate only very little to stocks.
There has never been any rolling 20-year period of time when stock investors have lost money. Had they stayed invested. And diversified. Properly. Especially after re-investing dividends. But it could happen. So what do we do? Allocate appropriately. Be ready to catch the upside when it occurs (not IF!); and be ready roll with the gut punch when it inevitably occurs.
The world does not end. It only appears to be ending. All things must pass, according to the “very famous investor”, George Harrison. It follows that all market declines are temporary, because the market is simply a reflection of the human condition and its proxy, the economy.
We humans, generally, as a species, are continuously (though not linearly) better off – better off than 20, 50, 100, 1000 years ago. Western society and values continue to grow. And with it, our human condition will continue on its upward trajectory. That is why the markets rise — inexorably and permanently.
That is the genius of free-market capitalism, which is the most universal and powerfuI force in the world. Remember, not only is this time not different, but also
“This time is never different!”
And it never will be different. Any other position is counter-factual. We have to have air-conditioning, cell phones, anti-biotics, plumbing, agro-industry, electric power, the internet…
Panic is the counter-factual, irrational loss of faith in our culture, our species, and in the future. Fear and Capitulation are a cancer that can only grow if you let it. It is nonsense. You cannot destroy ambition and opportunity and progress. These are hard-wired in our genetic code.
- 6. LEVERAGE.
This is perhaps the most dangerous of the Thirteen Great BIG Investing Mistakes, because investors can actually make a shallow argument for it when it’s done right. But rarely is it done right. And it has permeated our financial structure to the point of collapse.
Recall those cute, fuzzy, little Credit Default Swaps. They were insidious because some wound up effectively using them as weapon instead of a tool.
“Weapons of Mass Financial Destruction”.
Some of these instruments were leveraged 100:1. Yikes! Lookout below!
Everyone seems to have leveraged the Wrong way: borrowing the Wrong amounts, at the Wrong times and on the Wrong terms, in order to buy the Wrong things at the Wrong times for all the Wrong reasons. Investors, bankers, governments, and consumers – all were complicit.
And now we pay the price. Those of us who avoided the madness are bailing out the rest. That seems fair – to the wrong-doer!
Wrong loan, wrong terms, wrong stock, wrong time, wrong rationale: Shut Out.
- 7. SPECULATING AND GAMBLING INSTEAD OF INVESTING.
And not seeing, until it’s far too late, that you’ve traded reason for emotion, or worse. For example, the “dot.coms” at the turn of the year 2000 was a good example of this BIG Mistake, as well. People said, “I’m investing in e-commerce:’ and the tragedy is that they believed it,’ when they were in fact doing nothing remotely like investing.
They were buying shares in a company that had never made any money. The company raised equity with the stated intention of burning through it, as the business attempted to build clicks or unique visitors; not even market share.
Moreover, the business model of e-commerce had never made money, and indeed had not even existed five years earlier, because the platform on which it was being built (the Internet) was then still in its infancy. There was no assurance that the industry or the company would ever make money, much less achieve a return on capital to justify the risk.
There is a word — a perfectly respectable word — for putting money into an enterprise described in the foregoing paragraph. That word, however, is not “investing.” It is “speculating.” Which comes from the Latin word “gambling”.
Why would you ever speculate with any (large) part of your critical capital mass you earned and designated to achieve and fulfill the great goals of your life? So the ability to distinguish between investment and speculation becomes critical to financial success.
All short-term trading is speculation, since fundamental values do not change quickly if ever. An investor is always interested in long-term improvements in earnings, cash flows and dividends. A trader is interested in quick changes in price, and is therefore always a speculator. A gambler.
Similarly, all options and all futures contracts are speculations rather than investments because their ending value after expiration is zero. Therefore, buying (or selling) an option or a futures contract is a speculation on a change in the price of the underlying security or commodity, as opposed to an investment in the security’s (or the commodity’s) fundamental value.
The common stock of Microsoft is an investment; the September 30 Microsoft call is a speculation, as is the put. Gold is an investment, though not a very good one; a futures contract for the delivery of gold in November is a speculation.
Likewise, all hedges are pure speculations, in that the creator of the hedge has no interest whatsoever in the fundamental value of the securities or commodities he’s hedging: he just wants the spread to dose. That is, all he cares about are prices, and specifically what the prices do in relation to each other.
Just like the owner of one of the largest casinos in Las Vegas said, “I don’t care whether you win or lose; I just care that you play. The house makes money on the play.”
If you agree (and how could you not?) that one hedge, one futures contract and one option represent speculation and not investing, leads to the question of whether professionally managed portfolios of these synthetic instruments become, by virtue of the diversification and professional management, investments.
But the real critical question is the inclusion of such managers in your portfolio. Is the inclusion of a hedge fund, an options fund or a managed futures fund genuinely necessary to the efficient functioning of the overall portfolio? Are you convinced that you completely understand the basic risks, rewards and strategies of these funds and are you pretty sure you won’t get shocked into bolting out of it at the wrong times for the wrong reasons?
Most exotic instruments are speculations. Do not be fooled.
- 8. PERFORMANCE CHASING.
Selling a fund which has lagged for the last three years to buy one which has shot out the lights — is speculating rather than investing. It is track-record chasing, or trend-following, which is the essence of speculation. It is the exact opposite of a long-term investment decision.
Or the other way around: finding the best performing industry, stock, manager, or fund to invest in only to find out they cannot repeat the performance.
Studies have shown repeatedly that the top performers rarely repeat. And those that do, even for greater than 5 years, often fall below their peers or the “averages” in the next 5 years. The longer you go out, the worse the repeat.
Their success is pure random luck. Do not confuse luck with skill. This isn’t a game. This is your life’s hard earned legacy.
Know the difference between speculating and investing. Do not speculate with your critical capital mass. And you will never make this BIG Mistake.
- 9. INVESTING FOR CURRENT YIELD INSTEAD OF FOR TOTAL RETURN.
This is the classically BIG Mistake of that growing species: the American retiree. Another tragedy. This mistake is based on one simple truth “efficient markets”: investments that have the Highest Current Yield have the Lowest Total Return. While investments with lower current yield must compensate investors’ risk by offering higher long-term total return.
Which reminds me of the anecdote about the two “efficient market” economists. While walking down the street, they eye a new $20 bill. One stops to pick it up. The other says, “Why bother; since markets are efficient, this can’t possibly be real.”
Well, markets do work. Free Markets. “Efficient markets” is probably a misnomer. Because there are occasional, random, lost $20 bills to be found. It is just that waiting for these is not a prudent strategy for long-term Financial HealthTM.
Since retirees’ income must (a) typically last through three plus decades and (b) continually rise to offset the constantly rising cost of living, please focus not on today’s yield but on long-term total return on both current payout and appreciation as potential sources of income. Do not forget the
“THIRD SURE THING
INFLATION!
Inflation will eat you alive. It is the evil twin of compound interest. Recall what things cost 20 or 30 or 40 years ago. Imagine what they will cost in the future. Your future. Be prepared.
People who study this for a living indicate that the odds of at least one of you (currently aged 55) living to at least 90 is greater than 50%. And so many investors intend to leave a little something for those that follow behind them. So the time frame is even longer.
The only rational test of an investment’s long-term income-producing potential is its long-term total return. The total return of equities has been, over the long run, greater than twice that of bonds.
This is true for the last 10, 20, 50, 100, and 250 years, according to professors in London who studied the 16 nations with markets that existed over that long time period.
Nothing says the future has to look like the past trends. But, there is nothing to indicate that at least a semblance of those trends won’t persist. We have all heard that “gentlemen prefer bonds.” I doubt it. Besides, I would rather see you utilize some tax advantage in the form of annuities for that sure income.
After taking into account inflation, the excess returns of stocks over bonds, is closer to three times. Inflation has averaged 3.5%. Bonds have averaged 1% over inflation, while stocks have averaged 3% more than inflation. A three fold increase.
By this one rational test, then, equities are a much more reliable source of a constantly rising income stream; one that historically far exceeds increases in the cost of living. Equities, not bonds, are thus the vastly preferable long-term income investment. Hold that thought.
- 10. LETTING YOUR COST BASIS DICTATE YOUR INVESTMENT DECISIONS.
People just naturally, irrationally — and almost always fatally — get emotionally tangled up in the price paid for their investments. But your cost in an investment has nothing to do with its objective value today.
Your investments do not know nor do they care what you paid for them. And of course they would not perform any differently if they did. Your cost is sunk as soon as you buy it. Your investment either performs or it doesn’t.
If you look at your investments’ performance too frequently, your asset allocations are way off. If you own some “legacy” investment, it either does what you need and expect it to do, or it doesn’t.
This BIG Investment Mistake most often shows up in one of two ways. The first is the refusal to migrate back toward proper diversification because one very successful investment would generate substantial capital gains taxation.
In fact, at current rates, paying 15% in taxes to realize a great gain is a now rare opportunity that you should not turn down, especially since you could better deploy your money, with lower risks, to earn consistent and predictable returns. Who thinks taxes will stay this low? No one. Not even our political class.
A capital gains denier invariably frames the issue in the number of dollars in taxes he would have to pay if he sold.
“I can’t sell my XYZ investment;
I’d have to pay a Gazillion dollars in taxes”.
This typical “penny wise — pound foolishness” ignores the greater benefit. And the greater risk. It actually encourages the very same risk, the cost you wish to avoid. Kind of like saying, “I can’t afford fire insurance”, as you store gasoline and dynamite in your house, instead of an outbuilding. Are you saying “I can’t bring myself to pay even a 15% tax in order to take the remaining 85% out of harm’s way?”
The other major way this BIG mistake shows up? “I can’t afford the loss”. Nonsense. You can’t afford not to take the loss. Have the fundamentals of your situation completely changed?
Have you changed your time horizon, or your risk tolerance, or your goals? Do objectively verifiable facts matter?
So what if you paid $50 for an investment that now sells for $20 or $30. Why do you care? Has that become, in and of itself, the major reason for holding it? Are you hoping the price comes back?
Hope is not a strategy. The price now is what the investment is worth now. The price reflects all known and knowable information. Nothing more nothing less. It might be worth more in the future. It might be worth even less. You would rather invest for consistent and predictable returns, true? Of course, you would. And you will.
- 11. MARKET TIMING OR “TACTICAL ASSET ALLOCATION”.
In Bull markets, investors become too aggressive. Overweighting stocks beyond their risk budget on the Markowitz Efficient Frontier. Thus, taking on too much risk for too little gain.
It’s easy to look smart when all stocks go up. It’s easy to get lulled into a false sense of security. Worse, it leads to the false conclusion that what happened recently is likely to continue.
Just because the last 20 years, or 50 years, or even the last 200 years have benefited stock investors over bond investors, does not mean that trend will continue. It seems likely that it will. Remember,
“Predictions are difficult to make.
Especially about the future.”
Then, in Bear markets, investors become too conservative. Some even “go to cash” well after the portfolio value has dropped. That locks in losses.
Now you have to GUESS correctly twice! The first time when to get out. The second time – when to get back in. Usually investors get out too late. And, then this becomes compounded by getting in too late. AGAIN.
Or the un-coached investor has too much tied up in bonds. Remember bonds are debt instruments. You have the risk that someone may default on the debt. In the government’s case, the greatest risk is devaluation of the bond through inflation.
Tactical Asset Allocation is market timing in disguise. And it is despicable. Someone (usually a “genius” in San Francisco, or New York, or Boston, or Chicago) has a premonition (after reading tea leaves, or sheep entrails?) that this geographic location, or industry, or instrument is likely to perform better than any other.
They make a bet on your behalf. They are gambling with your money. Don’t believe me, just read any issue of Barron’s or Forbes and look at the interviews with these managers.
And they have a 50% chance of being correct. So, why not take a chance. It is not their money. You are paying them to bring “extra” value. And yet, they only succeed – that is they only out-perform the index – a measley 15% of the time. You have a better chance in Las Vegas. And the drinks are free.
- 12. FREQUENTLY CHANGING YOUR ASSET ALLOCATIONS.
This has the look and feel of market timing in the guise of tactical asset allocation. You either have an investment philosophy or not. You either have an investment game plan or not. You either have an Investment Policy Statement, or not.
You either achieve predictable and consistent market returns. Or NOT. If you do not, see number 13, below.
Any way, changing your asset allocations is a clear indication that you are losing ground in your investments. Stay strong. Get Rich.
- 13. NOT WORKING WITH AN INVESTMENT COACH.
How did we go from 6 to 13 Great BIG Investment Mistakes? Easy. You weren’t working with an Investment Coach.
Of course, I know you already have a “financial guy”. An advisor, a broker, or a planner. Most do. That’s normal. And this person is real nice; even takes me out to lunch once in a while. And most chose this person based on Age, Size, and Weight. That’s the most common method.
You know what I mean. “The company I work for has been around for eons; we represent 10,000 people just like you. We manage Billions of Dollars. So we must be great, right?”
Wrong.
We know who they are. Ferryll Pynch; Goldberg Lacks; Stealeman Brothers; Stear Burns; and on and on….Recent studies have shown that over 70% of investors are looking to change their financial person. With good reason. Investors are beginning to ask some questions:
How did they do for me? Do I have a written Investment Policy Statement? Do I know where my investments sit on the Markowitz Efficient Frontier? Do I know exactly how much my expenses are? Including the “hidden” ones? If they were so good, why were they unable to manage their own asset base? And most importantly,
Do I consistently and predictably achieve market returns?
Were my losses predictable, acceptable, understandable?
The only way you know you are not working with a Coach: if you can’t answer or don’t know or have never even heard of the above questions, or the remaining “20 Must Answer Questions”. These are crucial to successful, Health Investment ReturnsTM — predictably and consistently.
Not only that, but an “advisor” or a “planner” is often the source or cause of many of these mistakes. Some don’t know any better, and are unwittingly helping you to fail in your investment portfolios.
Others, are predators. Unfortunately, these are much harder to identify. Remember Madoff? Some do not align their interests with yours. Some are making these very same BIG Mistakes themselves.
I said, toward the beginning of this report, that you often see investors making a number of the Thirteen Great BIG Investment Mistakes simultaneously. You probably recognized that euphoria, panic, gambling and speculation, and leverage are among the most common BIG mistakes. And you probably already knew they lead to long-term poor results. Financial CancerTM.
We Empower You to Cure this Financial CancerTM.
Investing is easy. Successful investing for Healthy ReturnsTM takes great discipline. Like success in anything in else. “You wouldn’t take out your own appendix. You wouldn’t represent yourself in a lawsuit. You wouldn’t file your own tax returns.”
And you have just read about what happens when you attempt to manage your own finances. Or even when you engage the services of a “planner” or “advisor”. They are part of the problem. They are part of the Financial MalpracticeTM.
Stop the Financial MalpracticeTM.
But now you are open to Financial Coaching. To help you avoid these mistakes. “I Coach; You Win!”
The essence of good investment coaching is simply preventing the very costly,
BIG Investment Mistakes.
Simply, but not easily.
Like the physicians’, The Financial Physician’sTM oath,
“first do no harm”.
Call me now to get your Financial CAT ScanTM or to come to our next workshop to restore you Financial HealthTM and your get your FREE Gift.
