By: Investor Solutions, Inc.
My mom always taught me, “If you don’t have anything good to say then don’t say anything at all”. Sorry mom, but this time I’m not holding back! Working out at the gym the other night, I had the misfortune of being subjected to a popular investment show on a leading cable financial channel. The channel: habitual financial pornography purveyor CNBC. The investment circus, uh…I mean investment “show” was called…well better we leave the name out for the sake of avoiding a lawsuit. Let’s just say the show’s name was synonymous with “Crazy Currency”.
After twenty minutes on the elliptical machine and twenty minutes too much of watching this bumbling idiot scream his way through ridiculous “investment recommendations”, it dawned on me how much utter nonsense investors are exposed to on a daily basis in the media. Everything that spewed out of this guys mouth (“buy this”, “sell that”, “get out now”, “hold this for another XXX days”) is exactly the wrong message to send investors. Far too many unsuspecting investors believe this junk and subsequently jeopardize their financial futures by following these misguided “advisors” in the media. It has become my personal mission to shed light on this nonsense and hopefully help investors avoid some deadly mistakes.
So, I thought a “Lettermanesque” Top Ten List of stupid investor tricks was in order to shed some light on what NOT to do with your money.
- 10 Chase Yesterday’s Returns
Truth: Attempting to chase yesterday’s returns is an easy way to consistently lose. Maintaining a long-term strategy and sticking to it will vastly improve the ability to grow your account. Investors are misguided in thinking that past performance is somehow an indication of future potential.
- 9 Ignore Portfolio Risk
Truth: Portfolio volatility negatively impacts terminal wealth. Investors should be equally concerned about investment performance and risk control and strive for the highest return available per unit of risk.
- 8 Investment Policies Are Unnecessary
Truth: Investing without a clearly defined plan is like embarking on a cross country road trip without a map. An investment policy helps identify the appropriate universe and mix of assets to hold in a portfolio, given your specific level of risk tolerance and time horizon. Policies should be reviewed at least once a year and portfolios rebalanced at least once a year.
- 7 Avoid Foreign Investments
Truth: International investments need not be scary. The key reason investors flock to foreign stocks is not for higher returns, but for diversification. Modern Portfolio Theory proves that by adding international assets to a mix of U.S. stocks, investors reduce portfolio risk while enhancing risk adjusted returns.
- 6 Pick Individual Stocks
Truth: The fact is, there is an overwhelming amount of evidence that shows that there is little advantage in attempting to either time markets, or select individual equities. Such efforts instead, result in additional cost, additional risk, and lower returns over time. In addition, there is no evidence to suggest that past superior performance of a stock, fund or manager has any value in predicting the future performance of the stock, fund or manager. See #10 above.
- 5 Time the Stock Market
Refer to #6. Truth: Market timing is ineffective, expensive, tax inefficient and unnecessary. What drives investment returns is your asset allocation decision, not stock picking or market timing.
- 4 Trade Incessantly
Truth: Incessant trading by trigger happy investors increases portfolio costs and taxes. Investors are far better suited to outline a sensible, strategic investment plan and stick to it. Limit rebalancing to twice a year or specific variance measures.
- 3 Buy High Cost, Actively Managed Mutual Funds
Truth: Successful portfolios are based on research and reasonable expectations, not intuition. Illogical investors attempt to guess which manager, stock or asset class will have tomorrow’s best performance. That’s why so many have consistently failed. Successful, rational investors excel because of a clear methodology and, of course, discipline. High cost, tax insensitive funds are a drag on performance and ultimately terminal wealth. Avoid them!
- 2 Concentrate Your Investments
Truth: Holding large concentrations of any one investment or asset class (including company stock) will dramatically increase your portfolio risk, minimizing your chances of success. Avoid investment overlap and don’t buy two mutual funds that have similar characteristics.
- 1 Watch CNBC or Any Other Market Commentary Show
Truth: Television provides entertainment, not advice. The suggestions or tips made on popular financial cable shows have no direct correlation to investment success. Instead, the ones making money are the cable networks and the shows’ hosts who get to bag big bucks in advertising, employment contracts or proprietary investment software/newsletters. The tips offered on these shows are completely disconnected from the sensible and proven financial theories that academics and credible money manager have adopted long ago. Investors are far better served to adhere to a fundamental strategy and simply tune out the garbage on T.V.