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Top Ten Mistakes Made by Individual Investors


In the game of golf, it is often more important NOT to score a bogey than it is to make a birdie. In other words, PAR is a good score. This is a good analogy for success in investing. Essentially, investors achieve success by NOT making mistakes rather than by “picking winners”. The following is a list of ten common mistakes that individual investors make. Avoid these, and you may find yourself ahead of the game.

1.Trying to Do It Yourself – Although it may be tempting, the numbers do not lie; trying to do it yourself is not a good idea. The most recent Dalbar Study shows that the average equity mutual fund investor’s return was 3.17% versus 8.20% for the S&P 500 Index from 1970-2010. [1] Investment management is an ongoing process, not a one-time selection of individual investments. If you really enjoy watching the markets and selecting investments, choose to do so along with your investment advisor or consider having a small “play” account to satisfy your desires.

2.Trying to Time the Market – This may be the most enticing mistake on the list. Who doesn’t want to avoid the next market downturn? However, no one knows what will happen in the future or when the market will go up or down. The S&P 500 Index returned 9.99% from 1979-2010, but the investor who missed the 15 single best days during that same forty year period would have had a return of only 7.41%. Remember it is Time in the Market, not timing the market that counts.

3.Trying to Beat the Market – There is a pervasive message from the financial media and the investment profession itself that market returns are mediocre and investors need to beat the market. Every year, investors spend billions of dollars hiring active money managers to try to beat the market. In truth, very few (if not zero) active money managers consistently perform better than their benchmarks after accounting for fees and taxes. Fortunately, investors don’t need to beat the market to invest successfully.

4.Purchasing Expensive Financial Products – Whether it’s a “guaranteed” annuity, a hedge fund investment, a structured note, or private placement, there are a lot of expensive financial products being sold. This does not mean that ALL products that have high fees are inappropriate. Just remember, fees directly reduce your investment return. The product’s benefits must outweigh the expenses in order to qualify for your portfolio.

5.Watching Too Much Financial Media – Do not confuse financial news and entertainment with investment advice. Remember, television stations make money by increasing their ratings and selling advertisements. Prudent, long-term financial advice is not nearly exciting enough for today’s financial entertainment.

6.Confusing Volatility with Losing Money – If you invest in financial markets, you will experience volatility. In fact, investment returns are only possible BECAUSE investors take on risk. Short-term fluctuations in the value of a portfolio are not the same as losing money in the markets. However, investors that panic during bear markets and sell their investments, do miss the opportunity to participate in the market’s eventual recovery. You will have to ride out many ups and downs over your lifetime, so be prepared to stay the course.

7.Paying Sales Commissions – Sales commissions serve as incentives for investment sales representatives to; 1) recommend more frequent trading, 2) favor certain investment products over others, and 3) favor more expensive products over others. Investors are better served by working with a Fee-Only investment advisor or financial planner whose incentives are better-aligned with the investor’s goals.

8.Lack of an Investment Plan – This is probably the MOST IMPORTANT mistake on the list. You need a plan to execute the investment management of your portfolio. However, very few investors have a written Investment Policy Statement that will serve as a guideline and roadmap for managing their portfolio. If you don't have one, ask your advisor to help you prepare a written plan.

9.Staying With the Wrong Advisor – For a variety of reasons, many investors are working with the wrong advisor. Choosing a financial advisor is a complicated decision, and every investor has a unique set of needs and goals. Just remember, if you are not working with the right advisor, you are only hurting yourself.

10.Buying in to the "Wall Street Dream" – Last but certainly not least, investing is neither a gambling lottery nor a "get rich quick" scheme. The investment industry stands to make billions of dollars each year by selling you the "Dream" that you can use the financial markets to get rich. Financial markets are a place for you to grow and preserve the money you have already earned.

Investing for success is a long-term, disciplined process. However, by avoiding these ten common mistakes, you are well on your way to achieving success. Remember, PAR is a good score.

 


[1] 2010 Dalbar Study; http://www.dalbar.com/Portals/dalbar/cache/News/PressReleases/pressrelease20100331.pdf

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