Money Making Mistakes

On 06/01/2011, in Investment Strategies, by Jordan Wilson
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Some interesting examples of money making mistakes courtesy of CNNMoney.

Superficially, they each provide decent advice for individuals.

But they also provide deeper lessons for investors.

And an overall moral that applies to all examples. 

Vacation Home as Investment

I think this one misses the mark to some extent.

Yes, physically owning real estate has additional issues versus purchasing stocks, bonds, or even real estate investment trusts (REITs). But I know many individuals who have shown a profit owning a vacation property.

The issue in this example has less to do with the specific investment and more to do with due diligence.

According to the cited investor, “… vacation rentals are a whole new beast that I didn’t understand.”

If you want to invest in any asset class, do your homework before shelling out your capital. Never invest in any asset that you do not understand. Otherwise, the odds of showing a positive return are low.

Too Much Money in Employer’s Stock

A common problem for many investors. Especially those who work in companies with employee stock purchase plans.

Three lessons in this example.

First, the classic too many eggs in one basket investment principle.

Diversify, diversify, diversify. That way any adverse results for one investment will not have too great an impact on your overall portfolio.

Second, your employer is not just an investment.

Your company also provides your salary. If the company falls on hard times, you may be punished twice. Once on the investment side and possibly on the compensation side through pay cuts, lack of bonuses, or even being laid off.

Third, sentimentality is for suckers.

Take an objective, emotion-free approach to investing. Do not be greedy and take a rational view of investment risk and returns.

Trusted a Pro’s Picks and Ignored Fund Fees

Hmmm, I may have previously written a few posts on these two subjects.

Always be careful when following the investment advice of anyone. Studies show that it is questionable whether professional asset managers can outperform the market on a consistent, long-term basis. .

And, as we have seen previously, fees can have a substantial negative impact on long-term portfolio performance.

These are two reasons why I tend to recommend low-cost, passively managed, index funds for most investors.

Too Risk Averse for Age

Age is one factor in determining the amount of risk one should assume. But it is not the only factor.

The level of risk one assumes should relate to one’s overall personal circumstances. Phase of life-cycle, personal risk tolerance, financial situation, investment objectives, personal constraints, etc.

Short-Term Savings into Growth Stocks

Another point we have previously discussed.

You want to match your investment objectives to the most appropriate assets.

If you require liquid funds (i.e., cash) within the next six months, investing in venture capital or thinly traded equities is probably a mistake. Instead, terms deposits or money market funds are likely a better match for your needs.

Chased Hot Stocks

I hope you do not learn the same lessons as Mr. Resnick through an expensive trial and error process.

After experiencing losses, he is now “… much more of a buy and hold investor, and I’m more disciplined. I focus on diversification, stick with a long-term strategy, and keep fees low.”

Sounds good to me.

Failed to Rebalance

We will cover portfolio rebalancing in the near future.

While you generally want to follow a buy and hold strategy, you should stick to your investment game plan and the resulting target asset allocation.

At times, this will necessitate rebalancing your portfolio to some degree.

Panicked When the Market Plunged

“I should have been patient and stayed in there.”

Stick with your investment plan, assuming it is well thought out. Do not be lured by investment bubbles nor panic when markets go south.

I do not believe he has it correct now, sitting on the sidelines in a money market fund. Looks like this investor is still a little nervous.

The One Common Thread

In these eight money mistakes, there is one common theme.

I might call it a lack of common sense.

I do not think you need to be an investment expert to understand that you should not invest in things that you do not understand. Nor should you put too much of your wealth in any one asset. Or investing cash needed in six months into long-term asset classes. Or ….

Using some common sense will greatly help your investment success.

Most people possess some degree of common sense. But they get caught up in the investment moment. Hot stocks, vacation properties, shares in your company, etc., can all lead to emotional decision-making. And once emotions take over the investment process, your probability of success falls.

To ensure a rational and consistent approach, it helps to develop some investment skills. No need to become an expert, but enough to create a proper plan.

Also, this is where an Investment Policy Statement is key.

A very important tool if you want to develop a structured investment plan.

It will guide you in a systematic way towards achieving your investment goals.

 

 

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