Avoiding Investment Mistakes

Assuming you survived the past four years as an investor in the stock market, congratulations! Actually, someday, you might even realize that you have just learned an invaluable lesson, a lesson that you will probably even try to teach others immediately preceding the next cataclysmic stock market fall. However, realize that they, too, have to learn for themselves. Let’s revert to the past years to find out how we could avoid future mistakes and excessive losses. We will examine dos and dont’s that may help prevent the next portfolio disaster.

Dos

1. Know yourself. Think about what makes you tick and about what you have learned from your parents and grandparents about money and investing. Are you a gambler who is willing to lose more than average, or are you financially able to lose more than average? Is the fear of losing out of potential gain more painful for you than the fear of actually losing? These questions are the basis for determining your risk tolerance.

2. Understand your complete financial picture. Take a step back, set financial and retirement goals, and organize all of your assets, liabilities, and projected pensions. Be sure to include estimates of Social Security. Married couples should do this exercise together. Determine where you are now and where you want to go. Understanding your overall time horizon helps determine the amount of return that you need to pursue.

3. Determine your asset allocation. This is the process of deciding among stocks, bonds, and other fixed investments. Studies have shown that “92% of your ultimate return will be determined by your asset allocation decision.” Therefore, it would be wise to spend a majority of your time determining your asset allocation. When making an individual investment decision regarding one specific account, consider all investments and assets in your overall asset allocation.

Source: “Determinants of Portfolio Performance,” Brinson, Hood, & Beebower, Financial Analysts’ Journal, July-August 1986.

4. Choose your investments carefully. Third party investment advisor services are available to help you to compare similar funds to each other. Be sure that you are always comparing apples to apples. When selecting investments, attempt to look for an individual investment manager or a team of managers that has been there the entire time of the record that you are reviewing. Be careful not to select an investment solely based on the number of stars or on last year’s returns.

5. Eliminate emotions from your investment decisions. The roller coaster of greed and fear will destroy you, as will too much optimism or pessimism. Success in investing often lies in between. The ability to filter information without emotion is the key to success as is the ability to think, decide, and act independently of the masses.

Don’ts

1. Beware of whose advice you take. Neighbors, co-workers, friends, relatives, and television and radio personalities should not be your ultimate source for important investment decisions. Fellow investors often embellish gains and downplay losses. Listening to these stories often leads to excessive greed and fear. Listening to the constant pounding of good or bad news from financial shows, journalists, or radio personalities, and believing everything as gospel can also lead to poor decision-making. Do not forget that members of the media are selling ad space, not investments.

2. Beware of free meals. Getting investment advice from a complete stranger offering you a free meal is usually not a good practice, nor is petting a wolf in sheep’s clothing. Meeting an investment professional through a friend who has tested their services is usually a better idea. Advice is usually worth what you pay for it.

3. Do not time the market. Sensible long-term investing is not based on hunches or predictions of near term stock market moves. Instead, success in investing is often based on determining your ultimate asset allocation, occasional changes in funds, and regular rebalancing of the portfolio to maintain the original targets. Attempting to outsmart the market and moving in and out of cash is often an exercise in futility.

4. If you decide to hire an investment advisor, do not hire the first person that you meet. After obtaining the names of potential advisors from happy clients, schedule an appointment with several advisors. Beforehand, prepare a list of questions. Ask the same questions of every advisor. Ask for referrals, and call them. Do not be afraid to ask for a resume or a biography, and understand how the person gets paid.
Finally, decide whether you want investment advice only or comprehensive financial planning that includes investments. The advisor that you ultimately choose should be the one that you feel best suits your needs. When seeking an investment advisor, the FINRA website can provide information on any disciplinary actions taken against investment representatives. Do your homework, and do not forget that an advisor with a good personality does not necessarily make the best advisor.

Whether you are a “do-it-yourselfer” or someone who seeks professional advice, your emotions and personal input are vital to finding a portfolio that not only suits your long-term needs, but does so with a risk level you can personally tolerate. Get involved; don’t allow the next disaster.
Past performance is not indicative of future results. Securities are subject to market volatility. Investing may not be appropriate for all individuals. Always consult a qualified professional prior to making any investment decision. Investors should consider the fund's objectives, risks, and charges and expenses carefully before investing.

Securities offered through Securities Service Network, Inc. Member FINRA/SIPC. Jay L. Gershman, Registered Representative. Advisory Services offered through SSN Advisory Inc., Registered Investment Advisor. Jay L. Gershman, Investment Advisor Representative.