7 Deadly Sins of Investing: Don't make ANY of these investment mistakes...
Far too many people try to take investment matters into their own hands and suffer from ―poor performance-itis - a deadly wealth killing disease. This often happens from making one or several of these common mistakes:
1. Having too many portfolio holdings. Many people simply believe there is strength in numbers. You hear all the time, ―Don’t put all your eggs in one basket. While it is true you should diversify, you should be on the guard against “di-worse-ification” – having too many positions. A portfolio can be diversified having as few as ten holdings. Anything north of 50 positions can simply be too many to keep track of.
I once met a Harvard MBA who was a successful CFO for a fish company. He claimed to have ―all the answers‖ when it came to investing. When I looked at his portfolio, no lie, he owned over 250 different stocks. I asked him how he kept track of all these and his answer was simply "I don’t…" If a Harvard MBA can make this mistake, everyone else could as well.
2. Having no exit strategy or plan to sell if things go wrong. Finding the right investment to buy is only one side of the equation. Many people buy an investment and hold on for too long because of sentimental reasons (they worked there; their parents or grandparents owned it, etc. etc.). Fall in love with people not stocks!
At Faith-Based Investor, we have a disciplined sell process. We will sell if it meets one of these four criteria:
a) It reaches our target sell price and we want to lock in gains.
b) It hits our maximum loss threshold. The investment is sold to minimize losses.
c) We simply find a better alternative for our investment dollars. Sometimes when we are fully invested, we sell off a few holdings here or there to free up room for ―better opportunities‖.
d) It makes an unethical or immoral decision that keeps us from wanting to continue to own shares (i.e. they start producing a product or service that violates our faith or they donate money to causes that are not in line with our Christian values.
3. Buying what was hot last week. I often see investors have far too much exposure to sectors or investments that have been ―hot‖ recently (for example basic materials, emerging markets, etc.). This is a recipe for disaster as markets go through cycles and it often becomes a case of ―buying high‖ rather than ―buying low‖. It a sector or investment has risen rapidly, there is often a high probability of a pullback.
4. Having too much overlap. When you own five different energy or gold mining ETFs does NOT mean you are diversified! Same goes for owning multiple mutual funds that are buying the same types of companies.
There is a term called ―correlation‖. This simply means that investments that are similar (highly correlated) tend to move in a similar direction. By having too much overlap in a portfolio, you often exposure yourself to more risk than you bargained for.
Instead look to broaden your investment universe by looking for large company stocks, mid and small company stocks, international, emerging market, fixed income, real estate, precious metals, and other commodities to name a few.
5. Having too many extremely small positions. I have seen far too many investors take a shotgun approach to investing. They buy 100 shares here and there and end up paying too much in fees and commissions. Have a ―bigger picture‖ approach and utilize a discount broker to minimize your transaction costs.
6. Improper use of inverse ETFs or mutual funds. Inverse holdings (those designed to go up while the market goes down) are extremely volatile securities. Make sure you do not treat these as as long-term investments but rather use tem sparingly as a short-term ―hedge‖. If you utilize this strategy, make sure you monitor frequently and have stop-loss measures in place.
7. Paying too much attention to the news and overacting based on emotions. Let’s face it: we are living in difficult times. Unless you are old enough to remember the Great Depression, chances are these are by far the most economic times you have ever seen.
Remaining calm, collected, and level-headed during these trying times is no easy feat. However with a long-term approach and tactical strategies to take advantage of short-term opportunities, you can stay ahead of the curve and prevent costly mistakes.
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