14 investment mistakes to avoid

Many investors repeat the same mistakes. Self-awareness may help you recognize them in your own investing and make a conscious effort to avoid them. Or else you may have to learn the hard way by repeating your mistakes over and over until, as Meredith in Grey’s Anatomy said: “Why do I keep hitting myself with a hammer? Because it feels so good when I stop.”

Investment_Mistakes 1. Investment objective: A failure to set investment objectives, or setting unsuitable objectives.

2. Overtrading: It’s hard to overcome brokerage fees, bid-ask spreads and capital gains taxes if you’re skillful or lucky enough to have any. The bid-ask spread (the difference between the most a potential buyer bids and the least a potential seller asks) is often overlooked. Just remember that market-makers earn a living by exploiting the bid-ask spread.

It’s best to gradually buy high-quality, dividend-paying stocks you’re willing to own indefinitely. As billionaire Warren Buffett quipped: “Our favorite holding period is forever.” One way to assess whether you’re overtrading or not is to look at your portfolio turnover ratio. A turnover ratio of 0.2 is right for many successful investors. This means that you hold your stocks for an average of five years or more. A ratio of 1.0 or more is clearly excessive. Holding your stocks for a year or less doesn’t give the time they need to build their businesses. On the other hand, you shouldn’t keep poor investments simply to hold down your portfolio turnover ratio.

3. Lack of Diversification: It pays to balance your portfolio across and within our five economic sectors—finance, utilities, consumer products and services, manufacturing and resources. They all have days in the sun and in the ‘doghouse’. To diversify within utilities, you could buy one electricity stock, one pipeline and one telecommunications stock.

It also pays to diversify geographically. Over the past decade, American stocks beat most others—Canadian stocks, European stocks and emerging markets stocks. But at some point, American stocks will underperform their international peers. Also, diversifying geographically can cut your risk from extreme weather, extreme regulation, war and so on.

4. Over-diversification: While diversification makes sense, some carry it too far. If you own too many stocks (over, say, 30) it becomes hard to keep track of what you own. What’s more, winning stocks will have only a limited impact on your portfolio.

5. Selling winners too early: Brokers like saying that ‘no one ever went broke taking profits’. But the fact is, most successful investors have a few outstanding winners that more than make up for losses from stocks that didn’t work out. Selling your winners eventually leaves you with a portfolio of losers.

6. Holding losers too long: No matter how carefully you choose your stocks, some will fail to live up to their potential. After giving them enough time, you should sell your losers. This will free up cash to invest in better stocks. Also, you can use any losses outside of tax-deferred accounts to offset gains and reduce or eliminate any capital gains taxes.

7. Reaching for yield: One wag said: “More money has been lost reaching for yield than from the barrel of a gun.” When stocks sport very high dividend yields, it’s usually because the market sees the dividends as being unsustainable. If the company does cut its dividend, then income-seeking investors can lose money. Similarly, prior to the financial crisis of 2008 and 2009, investors seeking higher yields bought non-bank ABCP (Asset-Backed Commercial Paper). When the market for these investments froze, investors could not sell or could sell only at a steep loss.

8. Moving down the quality scale: High-quality stocks tend to grow over time. Low-quality stocks, by contrast, can go broke more easily, be ‘zombie’ stocks, or be out-and-out scams.

9. Failing to emphasize dividends: They encourage patience, can account for a large percentage of your returns and keep you out of the market’s worst mistakes. Growing dividends supported by improving earnings greatly increase your chances of profiting from share price gains over time.

10. Timing the market: Some hope to buy at the bottom and sell at the top. But very few investors master these skills. It’s your time in the market that pays. Bernard Baruch observed: “Some people boast of selling at the top of the market and buying at the bottom. I don’t believe this can be done except by a latter-day Munchausen.”

11. Ignoring Marpep Risk Indices: A portfolio of high MRI stocks leaves you vulnerable in market setbacks.

12. Short-Termism: Paying too much attention to short-term ‘noise’ can lead you to stray from a carefully thought out investment plan and make unwise investment decisions.

13. Acting on tips: Including Internet blogs and TV.

14. Inattention: Not having a one-page summary can lead to missed opportunities or outright losses.

This is an edited version of an article that was originally published for subscribers in the September 28, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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