The Ten Most Common Mistakes Investors Make and How to Avoid Them

Mistake #1 – Treating Investments like a Part-Time Job – Not in a business like manner.

You need to make sure your assets are managed in a systematic, disciplined way. That means having:

• A business plan that covers both the short and the long term
• Quantifiable goals against which to measure results
• A strategy for attaining your goals
• The right professionals to do the job

Mistake #2 – Not Having an Asset Allocation Strategy

When you develop an allocation strategy, it’s vital to start with the right questions, as well as a solid perspective on the historical risk and return characteristics of the various asset classes. Look at several investment scenarios and evaluate how well each mix fits your needs, depending on your:

• Time Horizon (How long you plan to hold the investment?)
• Income Requirements
• Tolerance for Risk
• Expectations for Return

Mistake #3 – Trying to Time the Market

“A Study of Economics usually Reveals that the Best Time to Buy Anything is Last Year” – Marty Allen

On Wall Street and among institutional investors, the consensus is clear: It is time – not timing – that make you successful in the market.

Mistake #4 – Letting Emotions Drive Investment Decisions

There are only two emotions on Wall Street; Fear and Greed

Mistake #5 – Ignoring the Biggest Risk of All

Ask investors to name their biggest investment risk and most will tell you it’s the chance of losing principal. But for all except the very wealthiest of us, loss of principal isn’t the biggest risk. Much scarier is the risk we won’t accumulate enough capital and we will outlive our money.

Survey after survey show that when it comes to retirement planning, most people are in serious need of a reality check. We tend to:

• Underestimate how much income we will need
• Forget how long our money might have to last
• Assume we will stay healthy
• Save much less than we should

Mistake #6 – Expecting any Manager’s Investment Approach to Work all the Time

In comparison to growth managers, value managers don’t experience the same highs, but typically do much better during down markets.
Market analysts have tracked results of these two styles over the years and their findings should interest every investor:

• No one style offers a clear performance advantage
• Styles work in extended, unpredictable cycles
• Style usually determines short-term performance

Mistake #7 – Hiring Managers Solely by the Numbers

If you heed the typical mistakes of small investors, you’ll never hire a manager based on numbers alone because there is a better way:

• Decide what investment style you’re looking for
• Look at past performance of managers who adhere to that style
• For managers on the short list, insist on a long-term record
• Research the qualitative factors that shape future performance

Mistake #8 – Getting Caught up in the Relative Performance Game

• Measure performance of your total portfolio against your targeted goals
• Always look at after-tax returns
• Don’t forget to take inflation and expenses into account
• Compare segments of your portfolio against the appropriate style benchmarks
• Recognize the level of risk associated with your return

Mistake #9 – Not Knowing When to Fire a Manager

When it comes to termination, investors frequently err in two ways: By firing managers they should keep and by keeping managers they should really let go. When affluent individuals make either mistake, it’s usually because they made a decision strictly “by the numbers”. But it doesn’t always make sense to fire a manager whose performance has slipped, or to keep one whose results have been good.

Mistake #10 – Not Having an Investment Management Consultant

An investment management consultant doesn’t manage your assets. Rather, he or she helps you create the strategic framework that is essential for the successful management of your assets.

Source: The Ten Most Common Mistakes Affluent Investors Make, by James P. Owen