7 Common Investing Mistakes

April 11, 2018

Investing can seem complicated and even intimidating to a lot of people, but I’d argue that’s it’s actually the easiest part of financial planning. All you really need to do is make sure you’re reasonably diversified (there is no “perfect” here), keep your costs low, and stick to your plan through thick and thin. No hours of reading the Wall Street Journal or watching CNBC are required.

Here are the most common big mistakes I see people making, along with the 3 steps to avoid all of them: 

1) Chasing past performance

Investments tend to go through cycles so buying whatever happens to be performing best will probably cause you to buy it closer to the top of a cycle then the bottom. If you sell it when it eventually under-performs, you’ll probably sell closer to the bottom. Repeat this enough times and you’re basically buying high and selling low, which is the opposite of what you want to do. 

Even if you’re buying a top mutual fund within a particular category (which eliminates the effects of market cycles), studies have found that these top performers don’t maintain their edge. In fact, they often do worse than average. You would have done better by flipping a coin.   

2) Trying to time the market

Instead of looking at the past through the rear view mirror, what about trying to invest based on what will happen in the future? This makes sense in theory, but in reality, the market is notoriously difficult to predict. You also have to be right not once, but twice. Even if you’re right about when to purchase an investment, how will you know when to get out of it? Professionals fail to consistently do this successfully, so do you really think you’ll be able to? 

3) Not being diversified

Another mistake I often see is people having too much money in a single stock. After all, while the stock market as a whole tends to go up over the long run, a single stock can go to zero and never come back. This is especially dangerous if it’s your employer’s stock since your income is already tied to that company.

A good rule of thumb is to never have more than 10-15% of your portfolio in any one company’s stock. If you have stock incentives or an employee stock purchase plan, consider selling the shares and diversifying as soon as you can to stay within that limit. 

4) “Diversifying” by randomly spreading money between all the funds in a retirement plan

The problem with this “diversification” is that you might not actually be properly diversified. For example, you can end up with 90% of your money in stocks if most of the funds available to you are stock funds. That might be fine if you’re an aggressive investor with a long time horizon but not if you are more conservative or have a shorter time frame to invest. 

5) Being too conservative for a long time horizon

Being too conservative can actually be risky, not in terms of market volatility but the real risk of not achieving your financial goals. That’s because more conservative investments tend to earn as much over long time periods. Even a small difference of return can have a huge impact.

For example, $10k earning 2% over 30 years would grow to $18k, while at an 8% return, it would be over $100k. That’s a “loss” of over $80k that could have gone towards your goals. 

6) Being too risky for a short time horizon

On the other hand, money that you need in the next 5 years should be invested very conservatively. That’s because investing it more aggressively puts you at risk of seeing the value of your investment decline and not recover in time. Don’t think it will decline in the next few years? Go back and visit mistake #2. 

7) Paying too much in fees

One way to avoid these problems is to pay someone else to invest for you, usually through a mutual fund. The problem is that the fees that fund managers charge typically outweigh any value they provide. A Morningstar study found that low fund fees were the most dependable predictor of future fund success.

This is why Warren Buffett has repeatedly recommended that people invest in low cost index funds that simply track the market. In fact, he recently won a $1 million bet by a landslide that a simple low cost index fund would beat any group of hedge funds over a 10 year period. 

3 simple steps to avoid these mistakes

  1. Make sure you’re properly diversified by taking a risk tolerance questionnaire and following the guidelines for your risk level, investing in a fully diversified fund like a target date fund, or using a robo-advisor that can design a portfolio for you. 
  2. Implement your plan using low cost funds like index funds. 
  3. Stick to your plan and rebalance about once a year to stay on track. 

That’s it. The more you fiddle with it, the more mistakes you’re likely to make. Now go enjoy the rest of your money. 

Even Jay-Z Has Investing Regrets — Why That’s Not Always A Bad Thing

November 09, 2017

“I could have bought a place in Dumbo before it was Dumbo for like 2 million. That same building today is worth 25 million. Guess how I’m feelin’?” — The Story of O.J., by Jay Z

Have you ever heard someone rave about their investment successes? They tell you how they got in that stock when it was worth nothing or how they sold out of the market just before the bottom fell out. It is easy to point to your successes in life, but I think failures teach the best lessons. Here Jay-Z gives us a glimpse of some of that pain. He speaks of an opportunity to buy a property in Brooklyn and passing on it. Now that property is worth more than 10 times what he would have paid for it.

Financial mistakes can be good for you

I am a strong believer that the lessons learned from financial mistakes are the best. You can be told a million times that it is a good idea to have a diversified portfolio but nothing gets your attention like going through a downturn with the wrong mix.

It definitely doesn’t feel good to lose like that, but if you can bear to examine those mistakes you will walk away with information that will put on the right side of opportunity the next time. Here is how to mine those investment mistakes to take away those gems of wisdom for future reference.

Making the most of money mishaps

Perform an autopsy on the mistake. Instead of kicking yourself over missing out on an opportunity or beating yourself up over buying something that did not perform, take a moment to think about what led you into that decision in the first place.

  • Was I being narrow minded or stubborn?
  • Were my priorities in a wrong place?
  • Did I not take the time to implement some basic rules into my investment decision?

My big investing lesson

When I look back on my own investment history, one big lesson I learned is that you cannot take advantage of an opportunity if you do not have the resources. I started in the financial planning business at end of the dot com boom. Coming out that recession I had a decent grasp on some of the brands that would thrive over the next decade because of my age.

What I didn’t have at the time was the savings to make truly meaningful moves on those opportunities. I was not in a financial crisis, but I was not prepared to sink capital into my own convictions. Because of that I missed on several great investment opportunities.

My lesson there was clear. I had to have my financial house together in order to take advantage of great opportunities when they come up.

Learning from others’ mistakes

While making your own mistakes is the most likely way to keep you from repeating them, there’s still value in examining what others, like Jay-Z, have to say about their own financial regrets. If you have a friend, a family member, or just someone you admire, ask them what lessons they have learned from their investment failures. I find the wisest people are the most gracious when sharing about this topic. They want others to know that success is not an easy road.

Warren Buffett, considered one of the greatest investors ever, essentially publishes his investment failures in his annual shareholder meeting. There are articles and podcasts dedicated to just that.

So now the secret is out: if you have made an investment mistake you are in very good company (assuming you consider Jay-Z and Warren Buffett to be good company!). The key is taking the lesson — your long term success is based on what you will do with your learnings.

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What I Learned From a Bad Movie!

June 29, 2012

Over the last weekend, I had the pleasure of seeing a new movie.  I really love going to the movies, but I rarely do it.  And when I do, it’s usually a Disney or Pixar movie with my kids.  So, it was a rare treat for me to get to go out with a friend and see a non-animated movie.  Being completely clueless about what movies were in theaters now, I deferred the decision to my friend who chose “Abraham Lincoln: Vampire Hunter” in 3D.  She had read the book and loved it, and she knew that I like historical fiction – books that take historical events and get “creative” with it. Continue reading “What I Learned From a Bad Movie!”