Mistakes are costly yet avoidable
Over the past fifteen years, I have seen every mistake in the book when it comes to investing. These mistakes are costly! Making one or several of these mistakes could cost you thousands or even millions of dollars over your lifetime. The sad truth is most of these errors are avoidable. Take a look:
1. Chasing hot returns: Many investors look at what’s been going up, up, up and they want to get in on the action. The big problem is they are often “too late to the party”. The invitations were sent months or years ago and now the investor arrives only to become disappointed because the party moved to a different type of investment. As we all know the object is to “buy low and sell high”, but chasing what’s hot often ends up in buying high and selling low.
2. Underestimating fees: Most investors are confused when it comes to investment fees especially with mutual funds. Take a look at these outrageous fees that add up over time:
|Assuming a $250,000 Portfolio||Retail Mutual Funds|
|Average advisor fee for assets under management1||0.90%|
|Average mutual funds/ETFs annual expense ratio2||1.19%|
|Average mutual funds/ETFs trading expenses3||1.44%|
1 Based on data provided by 561 advisory firms for Rydex Advisor Benchmarking Research Study (2009).
2 Based on all mutual funds tracked by Morningstar (as of 12/31/09).
3 Based on each mutual fund’s Statement of Additional Information, according to a study by Virginia Tech, University of Virginia, and Boston College titled “Scale Effects in Mutual Fund Performance: The Role of Trading Costs,” (March 2007). This research examined trading costs for a sample of 1,706 U.S. equity funds during the period 1995 to 2005.
3. Relying too much on past performance: Most new money (greater than 90%) goes into mutual funds with four or five star Morningstar ratings. Many gurus tell you to look at the ten or ten year track record of a fund. This is simply flawed advice. Do a little investment research or even ask Morningstar, the company doing the rating, and they will tell you that past performance is a poor indicator of future performance.
4. Buying an investment and holding too long. This may seem to be a smart strategy. Buy something and hold it for a long time and you’ll make money. In theory I agree with this premise, however, things change and sometimes quickly. This goes for mutual funds as they often change managers, strategies, or become “too large”. This also goes for individual companies as their fundamentals change or their business goes by the way side. Active management is critical especially during volatile times like now.
5. Failing to become properly diversified: A mutual fund is often considered “diversified” if it owns at least 16 stocks, yet these could all be in one sector such as energy. Often investors buy lots of different mutual funds but these funds can often be very similar in composition. The fact remains that most investors don’t understand what they are buying much less how all the parts work together. Many times this leads to taking on too much risk and unpleasant surprises when the markets drop.
6. Being too emotional. Without a disciplined process, greed and fear get the best of most investors. The markets are finicky and news stations report the “hype of the day”. Listen or watch the news for even a second and you may let your emotions impact your investment decisions instead of relying on hard facts.
7. Failing to consider the moral implications of investing. This one may not cost you in the true sense of returns, but when your values are compromised, how much is the profit worth the price? Additionally, many investors who do choose to invest with their values in mind fail to develop a proper values based plan. For example, an investor may choose a social responsible investment when they really wanted a moral responsible investment. Often there is a big difference! Regardless, most investors have a set of companies or industries they wish to avoid yet when invest they have no process to screen out these companies or industries
So how did you do?
How many of these mistakes are you making? Maybe it’s time for some changes. Let us know if we can help in any way…