Ten Common Investment Errors: Stocks, Bonds, & Management

Investment mistakes happen for many reasons, including the fact that decisions are made under conditions of uncertainty irresponsibly downplayed by market gurus and institutional spokespersons. Losing money on an investment may not be the result of a mistake, and not all mistakes result in monetary losses.

Errors occur when judgment is unduly influenced by emotions, when the principles of investing are misunderstood, and when misconceptions exist about how securities react to varying economic, political, and hysterical circumstances. Avoid these ten common errors to improve your performance:

1. Investment decisions should be made within a clearly defined investment plan. This is a goal orientated activity which includes considerations of time, risk-tolerance, and future income --- think about where you are going before you start moving in what may be the wrong direction.

A well thought out plan will not need frequent adjustments. A well-managed plan will not be susceptible to the addition of trendy speculations.

2. The distinction between asset allocation and diversification is often ignored. Asset allocation is the planned division of the portfolio between equity and income purpose securities. Diversification is a risk minimization strategy used to control the size of individual positions so they don't become excessive in either dollar or percentage terms.

Neither are "hedges" against anything or market timing devices; neither can be done properly with Mutual Funds; both are handled most easily using cost basis analysis as defined in The Working Capital Model.

3. Investors become bored with their plan too quickly, change direction too frequently, and make drastic rather than gradual adjustments. Although investing is always referred to as long term, it is rarely dealt with as such by investors who would have difficulty explaining simple peak-to-peak analysis.

Short term market value movements are improperly compared to un-portfolio related indices and averages to evaluate performance. There is no index that compares with a properly designed portfolio, and calendar divisions have no relationship to either market or interest rate cycles.

4. Investors tend to fall in love with securities that rise in price and forget to take profits, particularly when the company was once their employer. It's alarming how often accounting and other professionals fail to correct such errors.

Aside from the love issue, this becomes an unwilling-to-pay-the-taxes problem --- such unrealized gains frequently become Schedule D realized losses. Diversification rules, like Mother Nature, must not be messed with.

5. Investors often overdose on information, causing chronic  "analysis paralysis". Such investors become confused, hindsightful, and indecisive --- none of these bode well for the portfolio. Compounding the issue is the inability to distinguish between research and sales material --- quite often the same document.

A narrower focus on information that supports a logical and well-documented investment strategy will be more productive in the long run --- but avoid all future predictors.

6. Investors are constantly in search of short cuts or gimmick that will provide instant success with minimum effort. They initiate a feeding frenzy for every new product Wall Street produces --- Market Cycle Investment Management Portfolios will have none of it.

This product obsession underlines how Wall Street has made it impossible for financial professionals to survive without them. Remember this: Consumers buy products; Investors select securities.

7. Investors don't seem to understand the nature of Interest Rate Sensitive Securities and find market value fluctuation difficult to deal with. Operationally, the income portfolio "bucket" must be looked at separately from the growth portion. 

The simple assessment of bottom line market value for structural and/or directional decision-making is perhaps the most far-reaching error investors make. Most investors fail to reap the rewards that this portion of the portfolio can provide.

8. Many investors either ignore or discount the cyclical nature of the investment markets and wind up buying the most popular securities/sectors/funds at their highest ever prices. Illogically, they interpret a current trend in such areas as a new dynamic and tend to overdo their involvement.

At the same time, they quickly abandon whatever their previous hot spot happened to be, not realizing that they are creating a buy-high, sell-low  disaster cycle all their own.

9. Many investment errors will involve some form of unrealistic time horizon, or apples to oranges form of performance comparison. Somehow, somewhere, the get rich slowly path to success has been abandoned.

Successful portfolio development is rarely a straight up arrow and comparisons with dissimilar products, commodities, or strategies simply produce detours that speed progress away from original portfolio goals.

10. The "cheaper is better" mentality weakens decision making capabilities and leads investors to dangerous assumptions and short cuts that always prove to be ineffective. Do discount brokers seek "best execution"? Can new issue preferred stocks be purchased without cost? Is a no load fund a freebie? Is a WRAP Account individually managed?

When cheap is an investor's primary concern, what he gets will generally be worth it.

Compounding the problems investors face managing their portfolios is the sideshowesque sensationalism that the media brings to the process. Investing has become a competitive event for service providers and investors alike. This development alone will lead many of you to the self-destructive errors described above.

Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques. 

Is it difficult to manage a portfolio in an environment that encourages instant gratification, supports all forms of "uncaveated" speculation, and that rewards short term and shortsighted reports, reactions, and achievements?

Yup, it sure is.