In a recent article from the Intelligent Investor column of the Wall Street Journal, contributor Jason Zweig pointed out that investors in mutual funds earn annual returns roughly 1 to 1.5 percentage points lower than those of their funds. In hedge funds, it can be as much as 7 percentage points1. In short, it is a reminder that investors make many mistakes, especially when it comes to market timing. Therefore, it seems incumbent to take stock (again) of the mistakes we must avoid to get the most from our retirement plans and other investments. The following are seven mistakes investors should avoid,2:
- Not having clear goals. Most people focus on “get rich quick” ideas and popular investments for short-term gain without thinking about how an investment portfolio will give them a high probability of achieving their long-term objectives.
- Getting emotional and trying to time the market. Market timing is nearly impossible, and extremely difficult for the smartest, well-trained and well-tempered financial professionals. So investors trail the funds they invest in because their fear makes them sell low and greed makes them buy high.
- Never investing in the first place. Many people don’t start to invest because they don’t know enough or because they live for today over tomorrow. Worse than short-term volatility may be not investing at all for the future.
- Forgetting the value of diversification. Don’t put all of your eggs in one basket. It’s a tired cliché, but as true as when it was first said and as relevant today, even though nearly no one carries eggs in a basket anymore.
- Speculating on investment performance in the short-term. Near-term myopia blurs the path to the future: if your investments underperform in the near-term, don’t second-guess your long-term plan. Rethink whether or not the factors are still in place to help you achieve your long-term investment goals. Past results do not guarantee future performance. Good returns of the recent past are reflected in a high price today, putting you in the trap of buying high. Mean reversion exists in financial markets.
- Not knowing the risk you are taking. Warren Buffet has two rules every investor should live by: Rule No. 1: Never lose money, Rule No. 2: Don’t forget rule No. 1. Warren Buffett wasn’t saying that you can’t have unrealized (paper) losses in the short-term, only that you should understand your tolerance for volatility enough that you can avoid, as much as possible, selling any investment at a loss.
- Forgetting taxes and inflation. If you get everything else right, inflation and taxes will still be around to take their cut of your earnings. Both need to be taken into account. Tax-deferred does not mean tax-free. Low inflation today can still have a great impact over the long-term due to how it compounds every year.
You have to stay educated, even if you have an advisor or family member or friend you trust with your money. Protecting your wealth by avoiding costly mistakes is paramount.
1 Zweig, Jason, “Message to Advisors: Just Hold My Hand,” Intelligent Investor, Wall Street Journal, June 10, 2017
2 Stammers, Robert, CFA “Tips for Avoiding the Top 20 Common Investment Mistakes,” The CFA Institute 2016
For questions or more information, Ben can be reached at (352) 373-3337 or firstname.lastname@example.org. Securities Offered Through ValMark Securities, Inc. Member FINRA/SIPC. ValMark and Koss Olinger are separate entities. Advisory Services offered through Koss Olinger Consulting, LLC., An SEC Registered Investment Advisor.
By Benjamin Doty, CFA Senior Investment Director, Koss Olinger