There are six common investment mistakes that most investors make, which can have a significant impact on their overall savings and retirement income. Most people do not pay as much attention and time to their investments as they do to Monday night football or some other past time. As a result the following mistakes are often made contributing to less than stellar performance of their investments.
Common Investment Mistakes
These six mistakes include – Over Confidence; Following the Herd; Timing & Selection; Control of Your Investments; Paying too Much for Fees; Trust in your Adviser.
Investing is a lifetime exercise since savings while you are young are being put away for your retirement. As a rule we tend to make decisions based on our level of confidence as well as gut feel and not sound business analysis. If you did well pre technology boom in 2000, then you probably felt that the boom would continue and all you need to do is ride the wave. Warren Buffet was criticized for not getting on the band wagon when the tech boom was taking off. His rational was that he did not understand the tech boom and did not understand how many companies could sustain a long term profit / income profile. In fact he was ridiculed as being passe.
Well it turns out that all of the over confident people were wrong and he was right. Many companies suffered badly when the tech boom crashed and many went out of business. Warren Buffet is still as successful as ever.
Following the Herd
Following the herd is also a common mistake that many investors make. They assume that someone must know what they are doing and if so many people are investing in this manner it must be a good thing. The Housing bubble and the Tech bubble in recent times have shown us that following the herd is not always the right strategy.
Long term investing in quality equities that can withstand the test of market volatility and turmoil are often the better investment strategies. Following the herd also often means that the market is rising and investors are flocking to get on board at a time when equities and mutual funds are over inflated. This defeats the rule of buy low and sell high!
Timing & Selection
Many investors try to time their investments to catch an upswing in the market and sell as a downswing is starting. Some are in deed successful and numerous stories are told of massive profits of investors that have successfully timed the market. Unfortunately the majority are not able to time the market well for a variety or reasons and as a result do not make the massive profits that other investors are able to reap.
In fact studies have shown that the buy and hold investor is able to make 2 % more than the investor who tries to time the market. In addition buying selective high quality stocks further increases the probability of doing well with a buy and hold strategy instead of timing your investments.
Control of Your Investments
Control of your investments is really a myth. The stock market follows its own random volatility which investors cannot control. Following a fad such as the Santa Claus rally is totally outside your control since many investors are trying to time their investments around the Santa Claus rally and as a result changing the timing and the shape of the rally.
Paying too Much for Fees
The fundamental message here is that your investment adviser is working to make his income and not yours. It is true that if you do well , then their reputation increases, however they do not make money from reputations. Instead they make money from trades, whether it is selling equities, mutual funds or bonds. Every investment adviser makes money from more sales and that is one of the reasons they are constantly recommending additional investments for you to consider.
Doing a lot of trades may not always be the best answer. Trade commissions eat into your profits and enhance the income of your adviser. A buy and hold approach will significantly decrease the investment trade costs for you and improve your profit level from asset growth and dividend payments. Your adviser may not be happy with this approach and will no doubt try to sell you some additional investments. Review all with open eyes and what is best for you.
Trust in your Adviser
Trust in your adviser goes hand in hand with paying too many fees. Granted we are looking at our investment adviser for guidance and recommendations, however these all should be taken with a grain of salt. Examine the benefit to you for every investment you are about to make. Your adviser may be motivated by the commissions he or she will get and not necessarily whether it is the best long term approach.
This is not to suggest that they are dishonest, however when faced with recommending two different investments with perceived equal advantages to the inverter, the adviser will recommend the one that makes him or her the most money every time.
While these are not the only mistakes investors make, we can be confident if you are able to manage these six areas, chances are your investment return will be higher on average than the index’s and most investment adviser.
A key question to ask yourself. Did your adviser recommend that you sell prior to the downturn in the markets in 2009? Or was he pushing investments as if everything was going to continue to grow? Perhaps that is unfair, but then that is supposedly what you pay them commissions for.