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Value Creation Blog

7 Investment Disasters You Need To Avoid

Posted by Josh Patrick

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The main reason you want to hire an investment/wealth manager is to help you avoid investment disasters, if possible.  If you look at the research firm Dalbar, you’ll see that too many investors make the same mistakes and as a result, get a return that’s much lessthan the market.

Here’s a list of 7 that you should think about. 

You think what happened yesterday will happen tomorrow.

There is a saying, “history repeats itself.”  I’m not sure this is true, but it is true that history does have a pattern where similar things do happen.

If you think the market is always going to be strong, it’s likely that the market has been strong.  If you think the market stinks and will never come back, it’s likely that there’s been a recent market correction.

Warren Buffet has said, “That when the market is bad, it’s time to buy and when the market is strong, it’s time to be scared.”  This is the opposite of what you might have found yourself doing.  Don’t make this mistake. 

Know that markets go up and down and what happened yesterday is not necessarily what’s going to happen tomorrow.

You’ve made an investment, it did well and now it’s doing poorly.

And you decide that you need to ride it out because we know all poorly performing investments will always come back.  This is a problem that’s called “sunk costs.”  Simply stated, it means that the more effort and time you put into something, the less likely you’re going to be willing to pull the plug.

This is especially true with investments.  Make sure you don’t fall in love with your investments. 

I love Apple and at the same time I know there’s going to come a time where it’ll be time for to say goodbye.  Do you have any investments that you’ve fallen in love with?  If so, it’s time for you to fall out of love.

You buy high and sell low.

This is especially true if you spend time tracking the hot segment.  What’s hot today will almost surely become a dog down the road.  Tracking hot markets and then investing is almost always the wrong thing to do. 

If the market happens to be hot, it might be time to stop and think before you invest more.  If the market is cold, it’s often the very worse time to sell.  Choosing a well-diversified investment portfolio and then sticking to it has been proven to be the best and safest investment strategy over time.

You don’t save enough money.

This is the biggest mistake I see people make.  It doesn’t matter if you are the best investor in the world if you don’t save money.

You must provide raw material for your investments to work.  That raw material is the regular savings you put into your account on a regular basis.  Knowing what you need to save to hit your financial goals is important.  After all, wouldn’t you father have more than less money when it comes time to retire, have money for your kid’s college or that fabulous vacation you’ve been saving for.

You don’t diversify your investments.

This fits in with chasing the hot investment.  You can’t put all your eggs in one basket.

I know someone who has made a zillion dollars on just one stock.  She won’t sell and she won’t diversify.  There is only one thing that’s going to happen.  Some day and we don’t know when, that stock will tank and won’t come back.  When this happens, all the hard work of saving will have gone down the drain.  I doubt this is something you want to happen to you.

You don’t pay attention to underlying costs for your investments.

This is especially true if you use actively managed funds with the promise the manager will “beat the market.”

When a money manager actively pushes money around, they create costs.  First, the cost for having these investments is much higher than an index fund.  Second, the trading costs which are never disclosed are much higher than with an index fund.  In many cases, the cost of these funds is 3 to 4% higher than an index fund.  You have to be a world class investment manager to overcome these extra costs and there just aren’t that many of those types of managers around.

You’re overly optimistic about what your investment returns will be.

You tend to think you spend less than you do and you make more than you make.  This is also true with your investments.  You might think that you’re going to get a 10% long-term return on your investments.  The long-term returns on markets have been less than this.

When I tell clients to plan on a 5 or 6% return, they’re always disappointed in the short run.  At the same time, if we use a 10% return as a target, we’re likely going to get a much lower return and your financial goals won’t be hit.  I would much rather have you have too much rather than too little money when it comes time to spend it.

What about you?  Do you make some of these mistakes?  Are there some mistakes that I missed?  Why don’t you let me know in the comments below?

Topics: financial planning, wealth management, Investment Planning