NEW YORK – Every investor is unique, but financial advisers know of one way we are painfully alike: We tend to make the same mistakes over and over again.
The CFA Institute, a nonprofit group that certifies financial analysts, recently asked its senior members to share their thoughts about the most common and costly missteps individual investors make. Their informal survey generated a list of a dozen blunders made time and time again.
If you’re guilty of committing any of these errors, take heart – you’re not alone, and if you catch yourself, you could see better results.
•No strategy: By far, this is the biggest mistake investors make, said Robert Johnson, senior vice president of CFA Institute. “People tend to take a ‘ready, fire, aim,’ approach,” Johnson said. “They just start investing without any plan, when they should step back and take a look at what their goals really are.” To build a strategy, you should consider how much you’re able to invest, how much you can add to it over time, how much time you have to reach your goals and how much risk you’re willing to take.
Before you do any of that, however, make sure you have a budget, said Jeanie Wyatt, chief executive of South Texas Money Management in San Antonio. “Everyone needs a budget, even if you’re a multi-millionaire,” Wyatt said. Knowing your cost of living, your inflow and outflow and how much you can afford to invest will put you on the right track.
•Too little diversity: You might like the idea of owning a slice of a company, but single stocks are much riskier investments than diversified mutual funds. The best defense against market shifts is to maintain a broad portfolio that encompasses all the different asset classes and investment styles. But don’t confuse mutual fund diversity with portfolio diversity – owning many different funds that are similarly invested is not an adequate protection against risk.
•Investing in stocks instead of in companies: The only reason you should ever buy a stock is because you believe the company has sound fundamentals and positive long-term prospects, not because you’re hoping to snatch a profit from day-to-day price shifts. By the same token, liking a company’s product is not sufficient reason to buy its stock; if that’s all you know, you haven’t done your homework.
•Buying High: Most of us have heard the old Wall Street adage, “buy low and sell high.” Many novice investors get this backwards by “performance chasing” – not a smart strategy. This is when you invest in hot sectors that have already had a good run and are likely past their peaks.
•Selling Low: The other side of buying high – holding onto a security that has declined because you hope to recoup your investment. “Knowing when to sell is very challenging,” Wyatt said. But smart investors know when to cut their losses.
•Churning: In television commercials for brokerages, active traders always seem to be excitedly pointing and clicking to a rock music score. But in reality, frequent trading – and the commissions and fees that come with it – can eat into your total return.