Investing Mistakes that Will Lose You Money or Make You Cry
May 11, 2009
Over the past eleven years, I’ve seen many mistakes in the world of investing. I’ve certainly made a few myself. In just this short period of time, we’ve had the tech run and subsequent collapse. There was 9/11 and the pullback related to that. There was the emergence of BRIC (Brazil, Russia, India, China) as well as other emerging markets. Most recently there was what I like to call the Crash of ’08.
Throughout this roller coaster ride, some people have been wiped out by the fluctuations, where others have been very successful. Some of this has to do with luck, both good and bad, but a large portion of this has to do with knowledge and awareness. The mistakes listed below are not in any particular order. They each have their own sharp teeth that have taken very large bites out of portfolios.
Chasing Historical Returns
There’s a saying in the financial world, “Yesterday’s winners are today’s losers.” One major mistake made constantly in the financial world is the act of chasing performance. Investors who do this usually get burned twice on the same investment.
For example, in 1999, the ING Russia Fund was created. In the first year it was up almost 160%. Many investors started to rush into it in the second half of the year, and while they did get some of that big upswing, not nearly the whole thing. In 2000, the fund was down almost 18%. These same investors rush out of the fund at either a loss or a somewhat small gain. In 2001, the fund was up 80%. Generally those who chase performance don’t stick around long enough to actually enjoy it.
Misjudging Risk Tolerance
What do you see when you look in the mirror? Do you see someone who base jumps off of high rises and does stunts on motorcycles while doing 100mph on the freeway? Or do you see someone who brings their own anti-bacterial wipe to clean a restaurant chair? Can you be honest with yourself when you stare at that person in the mirror?
Another big mistake is when people can’t be brutally honest with themselves in regards to risk. It is very easy for someone to say they are an aggressive investor when the market is up 15%. However, when the market is down 12% and that person’s portfolio is down 20%, it’s usually a different tune they are singing. Investors must realize the reality of these risks. If you can’t sleep at night when the market is down, then you need to be more conservative.
Listening to Bad Advice
How many times have you heard this line, “My brother-in-law got this stock tip…” Choosing an investment because your brother-in-law, college roommate, pharmacist, etc., told you about it has disaster written all over it. You must do your own due diligence or hire a professional to do it for you.
I remember back in the late 90’s before the bubble burst on techs, a colleague of mine told a friend of his to buy this great stock called Lucent. He had purchased it at $35/per share and doubled his money. His friend purchased the stock at $81. It doesn’t take a lot of effort to find out what has happened to the company since…and that’s about how well the friendship is doing as well.
Lack of Diversification
There was a client of mine not so long ago that was a MCI WorldCom employee. She had worked for them for almost 20 years. She invested in her 401K up to the maximum allowed every year.
She was building a very nice retirement for herself through the 90’s. When the bubble burst and her company disappeared, so did over 80% of her nest egg. She had been putting the bulk of her money in WorldCom stock…
This is a good example of why diversification and asset allocation are so important. A properly allocated portfolio will take a hit in a bad market, but can generally weather the storm much better than a portfolio that has the bulk of it in one asset or type of assets. An investor should try to avoid having more than 10% of their portfolio in any one individual stock, bond, or other holding.
Listening to Media Spin
Booyah!!! Jim Cramer, the CNBC crew and any other station or website are there to provide you with news, but we all know what kind of news sells…the bad kind. There’s a reason why Britney Spears is on TV every other day. Everybody wants to watch a train wreck.
An investor must be able to filter through all of the “noise” and use the right information when trying to make an investment decision. Using what you hear on TV or read on an investment site can be very helpful, but it is not a substitute for your own due diligence.
There are many more mistakes that can be, and have been made. The two biggest enemies to investing are fear and greed. The third is ignorance. Make sure you understand what you’re buying before you make the decision to do so.
Contributed by Victor Alfieri
Very well written Mr. Alfiero. I will no longer lose money or cry as a result of investment mistakes.
Thanks again!
Ickey
I just came across your blog and have subscribed. I enjoyed this article because it speaks almost word for word to mistakes that I made years back with investments. I’ve been planning a few posts on my blog tied to things I’ve done wrong in the past, and this will certainly be a basis for some of the ‘oops’ things that have haunted me in the past.