Every investor makes mistakes. Although that applies to investment professionals as well, numerous studies have clearly shown that average investors have significantly underperformed the market as a whole…and…hard to believe…even the mutual funds in which they invest.
Why does this happen? The list of reasons is long and varied. Here are the primary culprits:
- Market timing,
- Mindlessly adhering to investment clichés,
- Poor diversification,
- Chasing recent yield or total return,
- Accepting “tips” from friends,
- Succumbing to fads,
- Approaching investing as a short-term trader instead of long-term investor,
- Working with advisors whose incentives may be in conflict with your best interests,
- High fees and costs,
- Inappropriately allowing tax considerations to drive investment decisions.
Many of these are related, but they are all “killers” of acceptable long-term investment performance.
So…what’s a person to do? How can the average investor avoid these mistakes? Here are four things you can do right now!
1. Develop and adhere to a written investment policy. This policy will take into consideration your tolerance for risk, goals and objectives, and the returns needed to achieve them. It will also address such things as planned liquidity, time horizon, and income tax considerations. It may even go further by defining acceptable loss limits. This written policy becomes your investment “game plan”. It should be adhered to unless…environmental and/or your personal circumstances have significantly changed and warrant a change to your game plan.
2. Avoid emotion-drive investment decisions. We’re talking about fear, greed, sentiment, and, yes, even love. In the context of making smart investment decisions, every one of these is your mortal enemy. A classic example is the late-90’s tech bubble and…greed. This emotion led intelligent people to abandon common sense and one of the most important investment principles: prudent diversification. There is no room for emotion in the world of investing!
3. Beware of behavioral biases. It’s great to have strong opinions, beliefs, and points-of-view, but don’t get overly attached. Circumstances – important circumstances – have a way of changing, so be willing to consider new information with an open mind. Success often breeds over-confidence in ourselves and in those who advise us. Remember that success has to be earned every time. Of course there many other biases such as herd mentality and failure to know the difference between good, useful information and “noise”. Examine yourself for these biases…you may be surprised.
4. Work with a competent Wealth Manager. Attaining above-average investment results over the longer-term is a daunting challenge, and few individual investors are up to the task. So…choose an experienced, independent Wealth Manager…who will put your interests first…who will ask the right questions and LISTEN to your answers…who is objective…who is versed in all facets of wealth management…who represents a team with bench depth…and…whose interests are aligned with yours!!!