Think millionaires don’t make investing mistakes? Think again. The deVere Group asked some of its wealthy clients to tell them about the biggest investing mistakes they made before getting professional guidance. It demonstrates that the rich are not that much different. Keep in mind that many people get rich by starting a successful business or inheriting money. That does not make them smart investors.
Here’s a list of five common investment mistakes, and how to avoid them:
5. Focusing Too Much On Historical Returns
Too often investors look at stocks, bonds and mutual funds in the rear view mirror, expecting the future to be a repeat of the past. This is rarely the case. It’s why mutual fund prospectuses always state “past performance is no guarantee of future results.” Too many investors buy into last year’s top investment ideas, only to find that they bought an over-priced lemon. Investment decisions need to be made with an eye to the future, not the past.
That’s why we build portfolios based on what we think the markets (& investments) will do in the next 6-36 months. Of course we also look at track records, but in a more sophisticated way than buying last year’s winners. And when investing in mutual funds, it’s vitally important to examine who is responsible for the fund’s performance and if that person’s still managing the fund.
4. Not Reviewing the Portfolio Regularly
Things change and your portfolio will change with it, whether you watch it or not. If you don’t watch it you could own GM, Enron or one of the banks that closed during the crisis in 2008. Every investment decision needs to be reviewed. The question you always need to ask about the investments in your portfolio is “if I did not own this security would we buy it today?” If the answer is “no,” it may be time to make changes.
We review your portfolios regularly, to make sure you’re on track with your stated goals. We also offer regular reviews with our clients and prepare reports for them to show how they are doing.
3. Making Emotional Decisions
The two emotions that dominate investment decisions are greed and fear. It’s the reason that the general public usually buys when the market is at the top and sells at the bottom.
We help take the emotion out of investing. We have a system in place that helps keep emotion out of the equation.
2. Investing Without a Plan
Most portfolios we examine lack a plan. In many cases they are a collection of things that seemed like a good idea at the time. This is often the result of stockbrokers selling their clients investments without first finding out what they really need.
We always invest with a plan. You tell us your goals, timeline, etc and then we use that as an investment guide. We don’t care about beating arbitrary indexes; we care about helping you achieve your plans with the least amount of investment risk possible.
1. Not Diversifying Adequately
One of the biggest risks people make is lack of diversification. It’s called putting all your eggs in one basket. This often happens when people work for a company that offers stock to employees via their 401(k) or other plan. Employees of Enron, who invested heavily in their own company via their retirement plan, were devastated when their company went broke. Sometimes investors own several mutual funds, believing that they are properly diversified only to find that their funds all do the same thing.
Nobody has ever accused us of being under-diversified. We champion broad diversification in every one of the MMF (Managed Mutual Fund) portfolios we create. We choose funds that invest in different segments of the investment market. We own many assets classes (bonds, stocks, etc.). We diversify geographically, including some overseas funds. And we have style diversity: growth vs. value, large cap. vs. small cap. With rare exceptions, there is always something in our portfolios that’s making you money.
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.