Part 9 of the series: Rethink the Way You Invest.
We have access to investment technology today that Warren Buffett could only have dreamt of several decades ago!
In today’s sophisticated marketplace, investors have all the information, advice, and tools they need to help them grow wealth effectively. With these resources at hand, it would seem natural that people could pursue a successful investment experience. However, lack of insight, emotions, and the temptation to speculate keep many investors from reaching their financial goals. Without a well-defined investment plan, investors may pick money managers for the wrong reasons and make other decisions that increase risk in their portfolios.
By understanding markets and the nature of risk, and learning to manage their emotions, investors may avoid mistakes that can compromise returns.
Here are some leading investment traps:
- No investment plan – You’ve probably heard this before, but it bears repeating: “People don’t plan to fail. They simply fail to plan.”
- Lack of manager scrutiny – We underestimate human risk. Very few people have developed a full-proof methodology for reducing the risk inherent in selecting an investment manager.
- Chasing performance – In past articles I’ve made it crystal clear that your chances of picking a winning manager by chasing his past performance are about as safe as driving your car backwards down a highway using the rear-view mirror.
- Over-concentration – Let’s take a walk down memory lane. Can you remember Confederation Life, Bre-X, Pan Am, Nortel, Enron, Lehmann Brothers? At one time, many investors thought these companies were a sure thing. Many lost their life savings through over-concentration.
- Market timing – Successfully timing the markets requires you to consistently get it right twice for each investment. You need to know when to buy and when to sell. Successful investors, over time, are those who diversify broadly among many asset classes and hold on through thick and thin.
- Wrong time horizon – If you’re saving up for a purchase within the next five years, you don’t invest in stocks or real estate. Conversely, if you’re looking to draw an income that grows with inflation, you don’t invest in bonds. Know clearly what you are saving for before you invest.
- Forecasting – Prophecy may be true in Scripture – it has never worked well in the markets. No one knows for sure what the future holds, so don’t even try to guess. The news changes without warning.
- Excessive risk taking – Yes, over time the market tends to reward investors according to the risk they take. It is risk, however, and that can blow up on you. Acknowledge all risk factors when structuring your portfolio.
I never said investing was easy! You’ll go far by making sure you and your financial advisor are consistently on the same page in avoiding these traps.