Seven Common Investor Mistakes

There are seven common mistakes made repeatedly by investors. Unfortunately, investors have been making these same mistakes since the dawn of modern markets and will likely be repeating them for years to come.

You can significantly boost your chances of investment success by becoming aware of these typical errors and taking steps to avoid them. In this article, we'll show you these seven mistakes and how to avoid them.

1. No Plan
As the old saying goes, if you don't know where you're going, any road will take you there. Solution?

Have a personal investment plan or policy that addresses the following:

Goals and objectives - Find out what you're trying to accomplish. Accumulating $100,000 for a child's college education or $2 million for retirement at age 60 are appropriate goals. Beating the market is not a goal.

Risks - What risks are relevant to you or your portfolio? If you are a 30-year-old saving for retirement, volatility isn't (or shouldn't be) a meaningful risk. On the other hand, inflation - which erodes any long-term portfolio - is a significant risk.

Appropriate benchmarks - How will you measure the success of your portfolio, its asset classes and individual funds or managers?

Asset allocation - What percentage of your total portfolio will you allocate to U.S. equities, international stocks, U.S. bonds, high-yield bonds, etc. Your asset allocation should accomplish your goals while addressing relevant risks.

Diversification - Allocating to different asset classes is the initial layer of diversification. You then need to diversify within each asset class. In U.S. stocks, for example, this means exposure to large-, mid- and small-cap stocks.

Your written plan's guidelines will help you adhere to a sound long-term policy even when current market conditions are unsettling. Having a good plan and sticking to it is not nearly as exciting or as much fun as trying to time the markets, but it will likely be more profitable in the long term.

2. Too Short of a Time Horizon
If you are saving for retirement 30 years hence, what the stock market does this year or next shouldn't be the biggest concern. Even if you are just entering retirement at age 70, your life expectancy is likely 15 to 20 years! If you expect to leave some assets to your heirs, then your time horizon is even longer. Of course, if you are saving for your daughter's college education and she's a junior in high school, then your time horizon is appropriately short and your asset allocation should reflect that fact. Most investors are too focused on the short term.

3. Too Much Attention
Given to Financial MediaThere is almost nothing on financial news shows that can help you achieve your goals. Turn them off. There are few newsletters that can provide you with anything of value. Even if there were, how do you identify them in advance?Think about it - if anyone really had profitable stock tips, trading advice or a secret formula to make big bucks, would they blab it on TV or sell it to you for $49 per month? No - they'd keep their mouth shut, make their millions and not have to sell a newsletter to make a living. Solution? Spend less time watching financial shows on TV and reading newsletters. Spend more time creating - and sticking to - your investment plan.

4. Not Rebalancing
Rebalancing is the process of returning your portfolio to its target asset allocation as outlined in your investment plan. Rebalancing is difficult because it forces you to sell the asset class that is performing well and buy more of your worst performing asset classes. This contrarian action is very difficult for many investors.

In addition, rebalancing is unprofitable right up to that point where it pays off spectacularly and the underperforming assets start to take off.

However, a portfolio allowed to drift with market returns guarantees that asset classes will be overweighted at market peaks and underweighted at market lows - a formula for poor performance.

Solution? Rebalance religiously and reap the long-term rewards.

5. Overconfidence in the Ability of Managers
From numerous studies, including Burton Malkiel's 1995 study entitled, "Returns From Investing In Equity Mutual Funds", we know that most managers will underperform their benchmarks. We also know that there's no consistent way to select - in advance - those managers that will outperform. We also know that very, very few individuals can profitably time the market over the long term. So why are so many investors confident of their abilities to time the market and select outperforming managers?Fidelity guru Peter Lynch once observed, "There are no market timers in the 'Forbes' 400'." Investors' misplaced overconfidence in their ability to market-time and select outperforming managers leads directly to our next common investment mistake.

6. Not Enough Indexing
There is not enough time to recite many of the studies that prove that most managers and mutual funds underperform their benchmarks. Over the long-term, low-cost index funds are typically upper second-quartile performers, or better than 65-75% of actively managed funds.

Despite all the evidence in favor of indexing, the desire to invest with active managers remains strong. John Bogle, the founder of Vanguard, says it's because, "Hope springs eternal. Indexing is sort of dull. It flies in the face of the American way [that] 'I can do better.'" Solution?

Index all or a large portion (70-80%) of all your traditional asset classes. If you can't resist the excitement of pursuing the next great performer, set aside a portion (20-30%) of each asset class to allocate to active managers. This may satisfy your desire to pursue outperformance without devastating your portfolio.

7. Chasing Performance
Many investors select asset classes, strategies, managers and funds based on recent strong performance. The feeling that "I'm missing out on great returns" has probably led to more bad investment decisions than any other single factor. If a particular asset class, strategy or fund has done extremely well for three or four years, we know one thing with certainty: we should have invested three or four years ago. Now, however, the particular cycle that led to this great performance may be nearing its end. The smart money is moving out and the dumb money is pouring in. Solution? Don't be dumb. Stick with your investment plan and rebalance, which is the polar opposite of chasing performance.

Conclusion
Investors who recognize and avoid these seven common mistakes give themselves a great advantage in meeting their investment goals. Most of the solutions above are not exciting and they don't make great cocktail party conversation. However, they are likely to be profitable. And isn't that why we really invest?

by Jay Yoder

Invest Without Stress

Many investors get a lot of anxiety chasing mutual fund returns, hoping that history repeats itself while they are in the fund. In fact, a fund which has already yielded large returns has less of a chance to do so again when compared with its peer group. A better idea, rather than stressing out over the vagaries of the financial markets, is to look for wisdom in time-tested, academic methods. Once your high-quality investment plan is set up, relax. Let your investment compound, understanding that the plan is rooted in knowledge, not hype.

Good Soil
As when growing a garden, you want to invest in good soil (strategy). Accordingly, you can expect there to be some rainy days (
with the sunny (bull market). Both are needed for overall growth. Once a garden (money) starts to grow, don't uproot it and replant, lest it wither and die. Set up your investment wisely and then let it grow.

Academic research creates good soil. The body of knowledge about the market goes through a rigorous review process whose primary goal is truth or knowledge rather than profit. Thus, the information is disinterested - something you should always look for in life to make wise decisions.

Greatly distilling this body of knowledge, here are a few key points to remember when it comes to investing in the stock market.

Risk and return
This concept is similar to the saying "there is no free lunch". In money terms, if you want more return, you are going to have to invest in funds that have a greater probability of going south (high risk). Thus, the law of large numbers really comes into play here, since investing in small, unproven companies may yield better potential returns, while larger companies which have already undergone substantial growth may not give you comparable results.

Market efficiency
This concept says that everything you need to know about conventional investments is already priced into them. Market efficiency supports the concept of risk and return; thus, don't waste your time at the library with a "Value Line investment" unless it provides entertainment value. Essentially, when you look at whether or not to invest in a large corporation, it is unlikely that you are going to find any information different from what others have already found. Interestingly, this also gives insight into how you make abnormal returns by investing in unknown companies like "Bob's Tomato Shack" if you really have the time and business acumen to do front-line research.

Modern portfolio theory (MPT)
Modern portfolio theory (MPT) basically says that you want to diversify your investments as much as possible in order to get rid of company- or stock-cspecific risk, thus incurring only the lowest common denominator - market risk. Essentially, you are using the law of large numbers in order to maximize returns while minimizing risk for a given market exposure.

Now here is where things get really interesting! We just found the way to optimize your risk-return tradeoff for a given market level of risk by being well diversified in your investments. However, you can further adjust the investment risk downwards by lending money (investing some of it in risk-free assets) or upwards by borrowing it (margin investing).

Best Market Portfolio
Academics have created models of the market portfolio, consisting of a weighted sum of every asset in the market, with weights in the proportions that the assets exist in the market. Many think of this as being like the S&P 500, but that is an index of only the 500 largest companies in the U.S. Instead, think total market and think globally. One limitation is that while you are investing in the world, you are spending your dollars in your own country, so at this point things get a little dicey.

Roughly, the world market cap is about one-third U.S. and two-thirds international. As mentioned earlier, if you live in the U.S., this is primarily where you spend your dollars, and thus you could either hedge the currency or beef up the U.S. exposure. To keep this simple and comfortable to the investor, a 50% U.S. / 50% international weighting will help you to get started.

Putting This Into Practice
You can achieve this weighting by selecting ETFs to replicate the market portfolio. You can buy an extended U.S. ETF and an international ETF, put them together and you have your duck soup! Now, you need to assess your greed versus fear: e.g., how much of your investment you want to put into the market portfolio versus T-bills. If you are more greedy than fearful, you could even do some margin investing.

A key item you'll want to consider when assessing your greed factor is the return potential. As a general rule, for the market portfolio estimate a 10% return on average with 20% annual swings up or down not uncommon. Compare this to U.S. Treasuries at a 3-4% rate of return with little principal swings if kept in short duration. Does knowing the difference of return vs. risk change your level of fear, greed or risk tolerance?

Risky Business
To uncover your personal risk status, you must assess your financial resilience first. This is how able you are to sustain a financial loss. How much portfolio value can you put at risk? Since the market generally goes up over time, this really becomes an issue of time horizon. If you have Junior's tuition due in a year, your time horizon is short on the section of your portfolio that must cover that expense. Conversely, if you are just starting your career, you can better ride out any storms from a longer time horizon.

Second, you must assess your psychological resilience. What would keep you up at night? If you are an anxious individual who checks the stock market every day, you probably should keep your market exposure low. However, if you are more comfortable with the market and are too busy to constantly review stock quotes, your psychology is better suited for a higher market portfolio weighting.

Conclusion
One of the best lines from a common cartoon to take with you each day is Lion King's "Hakuna matata," which means "No worries!" If you enjoy stock picking, go nuts, but do so for entertainment. If investing your nest egg is likely to cause you some anxiety, seek the academic, time-tested good soil and then rest well at night knowing you have done the due diligence and nothing more than modest rebalancing as necessary. A healthy harvest should follow as you learn to grow your green investing thumb.

by Dan Mongoose

what's investing

in·vest
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(n-vst)
v. in·vest·ed, in·vest·ing, in·vests
v.tr.
1. To commit (money or capital) in order to gain a financial return: invested their savings in stocks and bonds.
2.
a. To spend or devote for future advantage or benefit: invested much time and energy in getting a good education.
b. To devote morally or psychologically, as to a purpose; commit: "Men of our generation are invested in what they do, women in what we are" Shana Alexander.
3. To endow with authority or power.
4. To install in office with ceremony: invest a new emperor.
5. To endow with an enveloping or pervasive quality: "A charm invests a face/Imperfectly beheld" Emily Dickinson.
6. To clothe; adorn.
7. To cover completely; envelop.
8. To surround with troops or ships; besiege. See Synonyms at besiege.
v.intr.
To make investments or an investment: invest in real estate.
Noun
1.investing - the act of investing; laying out money or capital in an enterprise with the expectation of profit

Investment or investing[1] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin "vestis", meaning garment, and refers to the act of putting things (money or other claims to resources) into others' pockets.

source from dictionary/ thesaurus-the free dictionary