More mistakes investors make
In the second part of an article to mark World Investor Week, Robert Stammers, director, investor education, at the CFA Institute, looks at more of the common mistakes investors make.
11, Not knowing the true performance of your investments
It is shocking how many people have no idea how their investments have performed. Even if they know the headline result or how a couple of their stocks have done, they rarely know how they have performed in the context of their portfolio. Even that is not enough; you have to relate the performance of your overall portfolio to your plan to see if you are on track after accounting for costs and inflation. Don’t neglect this! How else will you know how you are doing?
12, Reacting to the media
There are plenty of 24-hour news channels that make money by showing “tradable” information. It would be foolish to try to keep up. The key is to parse valuable information out of all the noise. Successful and seasoned investors gather information from several independent sources and conduct their own proprietary research and analysis. Using the news as a sole source of investment analysis is a common investor mistake because by the time the information has become public, it has already been factored into market pricing.
13, Chasing yield
A high-yielding asset is a very seductive thing. Why wouldn’t you try to maximise the amount of money you get back? Simple: past returns are no indication of future performance and the highest yields carry the highest risks! Focus on the whole picture; don’t get distracted while disregarding risk management.
14, Trying to be a market timing genius
Market timing is possible, but very, very, very hard. For people who are not well trained, trying to make a well-timed call can be their undoing. An investor that was out of the market during the top ten trading days for the S&P 500 Index from 1993 to 2013 would have achieved a 5.4 per cent annualised return instead of 9.2 per cent by staying invested. This difference suggests that investors are better off contributing consistently to their investment portfolio rather than trying to trade in and out in an attempt to time the market.
15, Not doing due diligence
There are many databases in which you can check whether the people managing your money have the training, experience, and ethical standing to merit your trust. Why wouldn’t you check them? Ask for references and check their work on the investments that they recommend. The worst case is that you trade an afternoon of effort for sleeping better at night. The best case is that you avoid the next “Madoff” scheme. Any investor should be willing to take that trade.
16, Working with the wrong adviser
An investment adviser should be your partner in achieving your investment goals. The ideal financial professional and financial service provider not only has the ability to solve your problems but shares a similar philosophy about investing and even life in general. The benefits of taking extra time to find the right adviser far outweigh the comfort of making a quick decision.
17, Letting emotions get in the way
Investing brings up significant emotional issues that can impede decision-making. Do you want to involve your spouse in planning your finances? What do you want to happen with your assets after you die? Don’t let the immensity of these questions get in the way. A good adviser will be able to help you construct a plan that works no matter what the answers to these questions are.
18, Forgetting about inflation
Most investors focus on nominal returns instead of real returns. This focus means looking at and comparing performance after fees and inflation. Even if the economy is not in a massive inflationary period, some costs will still rise! It is important to remember that what you can buy with the assets you have is in many ways more important than their value in dollar terms. Develop a discipline of focusing on what is really important: your returns after adjusting for rising costs.
19, Neglecting to start or continue
Individuals often fail to begin an investment programme simply because they lack basic knowledge of where or how to start. Likewise, periods of inactivity are frequently the result of lethargy or discouragement over previous investment losses. Investment management is a discipline that is not overly complex, but requires continual effort and analysis in order to be successful.
20, Not controlling what you can
People like to say that they can’t tell the future, but they neglect to mention that you can take action to shape it. You can’t control what the market will bear, but you can save more money! Continually investing capital over time can have as much influence on wealth accumulation as the return on investment. It is the surest way to increase the probability of reaching your financial goals.
• For more information, please consult http://www.cfainstitute.org/investor/. The information contained in this piece is not intended to and does not provide legal, tax, or investment advice. It is provided for informational and educational use only. Please consult a qualified professional for consideration of your specific situation
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