10 Mistakes Investors Make
Published originally in the Jerusalem Post
Successful investing requires more than just selecting the right asset allocation, so how can you keep your portfolio on track in a volatile market?
It requires avoiding mistakes that can seriously hurt your long-term portfolio growth potential. By simply being aware and avoiding any one (or more) of the common mistakes that investors make, could greatly improve your ability to reach your investment goals.
Mistake #1: Not having clear Investment Objectives
Many investors who experience significant declines think to themselves "I just need to get my portfolio back to where it was". This reaction is understandable but too narrowly focused on recent events.
An investor must understand his personal goals and objectives before investing and these objectives should be reviewed annually. Without clear objectives and goals, you are much more likely to have an impulsive reaction to short-term market events.
Mistake #2: Not having an appropriate Time Horizon
Without an appropriate time horizon, an investor will focus too often on the short-term. Depending on when you might need the money (i.e. for your children or retirement), might mean you have a medium-term time frame or long-term. Changing an investment portfolio, while reacting to short-term price fluctuations is a prescription for poor results.
Mistake #3: Underestimating longevity
Perhaps the most unpleasant risk investor's face is running out of money during retirement. People work their entire lives to make sure this does not happen, however people are simply living longer. This means their money has to last longer.
The average life expectancy for a man living in a developed country whose current age is 60 is now 83.
As you evaluate your retirement portfolio, do not put your lifestyle or investment goals at risk by planning for too short a period.
Mistake #4: Ignoring the impact of Inflation on your portfolio
Investors often focus on the value of their portfolios without considering their purchasing power. A portfolio’s purchasing power can diminish due to inflation. Inflation’s negative impact on purchasing power means many investors may need more portfolio growth than originally anticipated.
When considering your portfolio’s return it is critical to include the impact of inflation. Even if inflation is as low as 2% per year (in average), a portfolio that grows at 5% annually has a real annual return of only 3%.
Mistake #5: Tiring of a long term investing strategy
After a long period of market volatility, an investor may be tempted to abandon their long-term investment strategy, particularly if the capital has dropped and then recovered but is not growing very fast. Such emotional decisions can be harmful because they remove the focus from achieving your investment goals. In times of market volatility, it is especially important that investors stay focused on their long term strategies and goals.
Mistake #6: Reacting after suffering Losses
After a sudden fall in stock markets, investors may be tempted to abandon stocks once they recover their losses.
Prudent investors know that stock and bond markets can be volatile. Historically, equity markets have forged ahead after recovering from a bear market and have gone on to new highs. In the throes of a bear market, it is easy to think the market will never recover.
Often the market begins to recover just when the average investor starts to liquidate his portfolio. The best advice is always just to stay the course.
Mistake #7: Improperly judging Risk
Understanding your ability to take risk and what risk means when investing is essential to structuring an effective portfolio. When looking at an investment it is important to investigate its risk profile and evaluate how much money could be lost if things go wrong.
Too little risk can lead to underperformance and not meeting long-term investment goals, whereas too much risk can lead to more losses than are acceptable to you.
Mistake #8: Avoiding diversification
Most investors know it is smart to diversify, yet most stay invested in their local/favorite market. A portfolio with only US stocks misses the rest of the global stock market as America represents about half of the world’s developed equity market and less than 25% of the global economy.
So do not make the mistake of focusing solely on one market, diversify your portfolio.
Mistake #9: Making investments based on the media
Capital markets efficiently price in news that is available to the public and it becomes reflected in share prices. Reacting based on the media results in trend following, poor timing and overreaction.
In order to beat the market, investors must either know something others do not or interpret the information differently. Gaining this knowledge is difficult but not impossible. It takes experience, research, strong analytical skills and time. Many investors do not have the time or skills to do this and therefore choose to use the help of an investment advisor to beat the market and plan their investment portfolio.
Mistake #10: Asset Allocation
An inappropriate asset allocation can have a far greater impact on your performance than the equities you choose or timing the market, and this has been proven in numerous studies. Balancing a portfolio to suit your financial needs and risk profile is essential, especially when the markets are volatile. While equities may outperform in the long run, bonds offer some stability when equities are not performing and they give an added income into the portfolio.
The writer of this article and/or Pioneer is unaware of any conflict of interest at the time of publishing the article. The aforementioned information is not a substitute for personal investment marketing or portfolio management, which takes into account the particular circumstances and special needs of each person.