5 Common Investment Mistakes, and 4 Strategies to Follow Instead

It's common to have the illusion of control when owning stock in the companies we work for, but even as an insider it can be tough to forecast major downturns for your company or industry.

The Mistake 4: Mad money–Over-reacting to media coverage, trading too much and trying to time the market.

I remember the days before there was 24 hour coverage of financial markets. I grew up with Lewis Rukeyser's public broadcasting show, "Wall Street Week,, and used to look at the newspaper to find stock prices for my first investments. In my first experience working for an investment firm, I fielded phone calls from investors calling for stock quotes. I still have memories of a caller my colleagues nicknamed "Mr. AMD," an investor who phoned us 10-15 times per hour to get an updated price for Advanced Micro Devices stock!

Twenty-four hour coverage of markets encourages some unfortunate investor behavior.  Investors trade too much, frequently selling when they should buy and buying when they should sell; all while incurring unnecessary transaction costs and taxes.

Few, if any, professional investors have been successful market timers; for amateur investors a market-timing strategy is even less likely to be successful.

Mistake 5: Following the "rules:"–Following simplistic rules of thumb regardless of personal circumstances.

The "4% rule" is commonly cited as the amount that retirees should draw from their retirement portfolios, providing in theory a steady stream of funds while maintaining an account balance that will last through retirement. 

Many variables can influence whether a 4% withdrawal rate is viable, including life expectancy, variability of stock and bond market returns, and the trajectory of medical expenses. The 4% rule may not work for everyone; particularly if we are now in a low-return era for stocks and bonds.

The "100 minus age" rule is often cited as a way to determine how much of a portfolio should be invested in equities. This rule can be uniquely off target, considering rising life expectancy as well as dramatic differences in retirement preparedness.  

Rules can be a good starting point for discussion, but shouldn't be followed blindly.

So if those are the common mistakes you should avoid, what are your other, more rewarding options?

4 Alternative Strategies to Consider

Strategy 1: Develop a plan and stick with it: Determine goals, understand risks, establish a monitoring process and adjust course when necessary.

1. 1. Budgets are your friend!  Investments may be more fun than managing spending, but a disciplined spending and savings plan may provide more predictable results. In many cases, managing liabilities such as credit card debt can yield a greater return than managing investment assets. In the current investment environment, paying off debt with interest rates of 10% or higher may yield a better return than investing in stocks or bonds.
   2. Follow a systematic investment approach.  Emotions can be the enemy of investment success. A strategy that incorporates regular investments, periodic rebalancing to target weights and avoiding emotionally driven decision-making is more likely to succeed.
   3. Diversify your portfolio.  A diversified portfolio generally offers a better balance of risk and return than concentrated strategies. Diversification among stocks, sectors and countries may be the most reliable path to reaching financial goals.

Strategy 2: Avoid silent killers: Costs are much easier to control than investment performance.  High costs and high turnover can create a high hurdle to clear for investment success. 

Strategy 3: Simplify:  The best solutions are often the most simple.

1. 1. Avoid investments you don't understand  I'm skeptical of many leveraged ETFs that are only suitable for short-term trading strategies. I'm also wary of quantitative strategies that can't at least be explained in conceptual terms to a prospective investor, and that have nothing more than a theoretical back-tested track record.
   2. Don't go overboard diversifying your portfolio. I remember one investor who came to us with about 30 stock holdings, 50 mutual fund holdings, and 10-15 ETFs. Counting underlying positions within the mutual funds and ETFs, I think he owned about 30,000 positions, far more than needed to properly diversify his portfolio!  A portfolio of that complexity can be unwieldy and expensive to maintain.  There are often much simpler approaches that will yield better outcomes. 

Strategy 4:  "When the facts change, I change my mind":  In a quote commonly attributed to John Maynard Keynes, "When the facts change, I change my mind." Investors should constantly "test" their investment point of view – reviewing whether to alter investment positioning based on new information that changes the outlook for the investment in question.

Historical performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss of income and/or principal to the investor.  Nothing in this communication is intended to be or should be construed as individualized investment advice.   Securities mentioned are for illustrative purposes only and do not represent securities bought or sold by Adviser for its clients.