Investing isn’t a game. If you screw up, real money is lost.
As a broker and supervisor for a major discount brokerage firm for close to two decades, I saw it firsthand. People lost their children’s college tuitions and even their own retirements.
Now, I’m no longer an advisor, and the following are simply my opinions. With that in mind, here are the six most common mistakes investors make.
1) Having a Poor Plan – or No Plan at All
Having no plan is just foolish. But a poor plan may be even worse. Imagine someone saying, “I’ll just buy XYZ stock. It’s been doing great. That will fund my retirement.” That should give you a sense of what I’m talking about.
Whether or not they have an advisor, every investor should have a written plan that lays out their specific objectives, including details concerning time frame and risk tolerance.
Also, as an investor’s financial situation changes, the plan needs to grow and evolve accordingly. Keep in mind that life expectancy continues to rise, so a portfolio needs to last longer than most people think.
Remember, too, that each person’s circumstances are different. A cookie-cutter approach won’t work, which is why I’m not a fan of robo-advisors.
2) Betting That a Bull Market Will Last Forever
Don’t gamble on a bull market in stocks lasting forever.
That’s the message you’ll get if you watch CNBC, which is full of permabulls. If you must watch CNBC, I recommend doing so with the mute on.
In reality, bull markets aren’t eternal. That’s also the reason I’m not a fan of S&P 500 index funds. If a financial storm hits, you have absolutely no chance – you’ll go down with the market.
3) Trusting an Advisor Implicitly
Some of you probably have a professional advisor, and that’s great. Just remember the words of Ronald Reagan: “Trust, but verify.”
Most advisors are darn good at their job. But stay engaged, and don’t just leave everything in the hands of your advisor. Follow the markets and see if you think what your advisor is doing is right. If you have doubts, always get a second opinion.
I recall the 2008 financial crisis, when many portfolios took major hits. Some advisors resorted to what I call the “Three Stooges defense,” where Curly says, “I’m a victim of circumstances.”
In other words, some advisors were saying that no one could have foreseen this. Nonsense. The warnings were all there for someone with the market experience to see.
Ask your advisor if he or she has been through a bear market. Or, if not, see if they can even explain to you what a bear market can do to stocks.
4) Thinking You’re Diversified When You’re Not
In my time as an advisor, I found that many investors didn’t actually understand what they were invested in.
I can’t even recall the number of times I sat down with a client who proudly showed me their “well-diversified” portfolio, which turned out to be anything but.
Here’s an oversimplified hypothetical: Bob had a portfolio with seven different mutual funds that looked good on the surface. But when I dug a little deeper, I had to tell my client, “You’re not diversified at all. These funds are all heavily invested in technology stocks. You have 40% of your portfolio in one industry in one country. That is not diversification.”
Needless to say, a reshuffling of the deck was required.
5) Ignoring the Rest of the World
A related problem is absolute lack of exposure to the rest of the globe. A shocking number of clients had zero exposure to foreign markets.
Ten years ago, the United States made up 41% of the world’s stock market capitalization. Five years ago it was 30%, and as of the end of 2014, it was 37% – barely more than a third. Now, there’s no denying that the U.S. market has outperformed its overseas counterparts in recent years. But that’s still no reason to ignore the 63% of the world’s market cap currently outside the United States.
I don’t know about you, but I don’t do all my shopping in just one aisle of the grocery store.
6) Trading With Long-Term Money
One final, critical mistake investors make is day trading with their long-term money and trying to time the market.
You’d be surprised how some people tried to play catch-up in their retirement account by day trading. Warning: I have yet to meet a day trader who has been successful over the very long term. I’m talking decades here.
Ultimately, I hope my experience working with retail investors proves useful to you. After all, investing isn’t an easy “game” to master.
Good investing to all,