By John Drachman
Some of the personal attributes that serve us so well in our daily lives and careers can actually trip us up in surprising ways when applied unfiltered to the complex decision-making that leads to building an investment portfolio. Here are the top five bloopers to avoid:
- The compulsive search for something better. In a career, impatience can be the spark you need to make a successful career move. In the world of investing, it can lead to over-trading, higher fees and lower returns. Market timing, where the investor tries to “guess” the best time to buy or sell an investment is another culprit. In “Determinants of Portfolio Performance,” authors Gary P. Brinson, L. Randolph Hood and Gilbert Beebower debunked the value of market timing, noting that, nearly 96% of a portfolio’s price variation can be explained by how the assets were allocated – not when the assets were bought or sold.
- Stalling for time. Some of the best deal makers know how to delay a decision to wear down a competitor. Unfortunately, recouping from an investment loss doesn’t work that way. Depending upon your objectives, your portfolio might be better off by realizing your loss quickly and deploying those assets to a better opportunity elsewhere.
- (Overly) big picture thinking. Employing broad strokes in decision-making in favor of drilling down into the details can accelerate the action that leads to better results. That’s not always so in the world of investing. The renowned investor Warren Buffett warns against investing in businesses we don’t truly understand. Whether you’re thinking about investing in a single company or a specialized fund, know the underlying basics of the industry you’re considering. Ignorance of how a business model works is no defense against losing money.
- Falling in love with an investment. The lure of tech companies in particular can prove irresistible. After all, if you’re using your smartphone all day long doesn’t that indicate you should be investing in digital devices? You’re probably better off saving your love for those who can love you back. Regardless of an investment’s glamor, you bought it to meet cold, targeted objectives. If any of the circumstances changed that led you to buy it in the first place, be cruel. It might be time to cut the cord.
- Upping the ante. If the commitment to a personal or professional activity produces a desired result, the tendency is to “turn up the volume.” Investment outcomes though are more complicated. If someone says, “I did well in the biotech sector – and I am ready to double down,” they can throw their portfolio out of balance. Exposure to the tech sector in the 90s for example led to the dot-com bust of that era. To stay diversified, it’s best not to allocate more than 5% to 10% to any investment sector.
Overcoming Unforced Errors
The good news is that bloopers like these and others can be avoided. Reaching your financial goals requires time, money and personal discipline. A trained financial professional can assess your comfort with risk, match your objectives with suitable investments and make sure you keep investing with your head – and not your heart.
John Drachman is a contributing to MyPerfectFinancialAdvisor the premier matchmaker between investors and advisors .John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.