Investment Advisers and the Pitfalls

6 Investing Pitfalls to Avoid
Here are the top mistakes that cause investors to lose money unnecessarily.

  1. Using a Cookie-Cutter Approach
    Most investors—along with many of the people who advise them—are satisfied with a one-size-fits-all investment plan. The "model portfolio" is useless to most investors. Your individual needs as an investor must govern any plans you make for investment. For instance, how much of your investment can you risk losing? What is your investment timetable (i.e., are you retired, a young professional, or middle-aged)? The allocation of your portfolio's assets among various types of investments—Treasuries, blue-chip stocks, equity mutual funds, and others-- should match your needs perfectly.

  2. Taking Unnecessary Risks
    You do not have to risk your capital to make a decent return on your money. There are many investments that offer a return that beats inflation—and more—without unduly jeopardizing your hard-earned money. For instance, Treasuries, the safest possible investment, offer a decent return with virtually no risk. Blue-chip preferred stocks, common stocks, and mutual funds offer high returns with a fairly low level of risk.

  3. Allowing Fees and Commissions to Eat Up Profits
    Many investors allow brokers' commissions and other return-eating costs to cut into their returns. Professionals need to be compensated for their time, however, you should make certain that the fees you are paying are appropriate for the services performed.

  4. Not Starting Early Enough
    Many investors are not cognizant of the power of interest compounding. By starting out early enough with your investment plan, you can invest less, and still come out with double or even quadruple the amount you would have had if you started later. Another way to look at it is that by investing as much as possible earlier on, you'll be able to meet your goals and have more current cash on hand to spend.

  5. Ignoring the Cost of Taxes
    Every time you or your mutual fund sells stocks, check whether there is any capital gains tax applicable in your country. Unless you are in a tax-deferred retirement account, the taxes will eat into your profits.

    What to do: Invest in funds that have low turnover (i.e., in which shares are bought and sold less frequently). Your portfolio, overall, should have a turnover of 10% or less per year.

  6. Letting Emotion—or Magical Thinking--Govern Your Investing
    Never give in to pressure from a broker to invest in a "hot" security or to sell a fund and get into another one. The key to a successful portfolio lies in planning, discipline, and reason. Emotion and impulse have no role to play in investing. Similarly, do not be too quick to unload a stock or fund just because it slips a few points.

    Try to stay in a security or fund for the long haul. (On the other hand, when it's time to unload a loser, then let go of it.) Finally, do not fall prey to the myth of "market timing." This is the belief that by getting into or out of a security at exactly the right moment, we can retire rich. Market timing does not work.

    Instead, use the investment strategies that do work: a balanced allocation of your portfolio's assets among securities that suit your individual needs, the use of dividend-reinvestment programs and other cost-saving strategies, and a well-disciplined, long-haul approach to saving and investment.

Use Caution When Trading Online
More and more people are trying their hand at online trading. But there are more pitfalls to online investing than in traditional modes.

The Better Business Bureau and the Ohio Division of Securities offer the following cautions:

  • Receive full disclosure prior to opening your account about the alternatives for buying and selling securities and how to obtain account information if you cannot access the firm's Web site.
  • Understand that most likely you are not linked directly to the market and that the click of your mouse does not instantly execute the trade.
  • Obtain information before trading about entering and cancelling orders (market, limit and stop loss) and the details and risks of margin accounts (borrowing to buy stocks).
  • Learn whether you are receiving delayed or real-time stock quotes and when your account information was last updated.
  • Review the firm's privacy and Web site security policies and whether your name may be used for mailing lists or other promotional activities by the firm or any other party.
  • Don't assume an order has not been executed if there's no confirmation. Some investors repeat an order because they haven't received confirmation on the first order. Don't jump the gun lest you end up buying twice the amount you intended.
  • Confirm cancellations. Find out from your broker how to confirm cancellations. Then, double-check that an order has been cancelled before you decide to make another order.
  • Use the back-up system. Online brokers often have a back-up system for online trading. It could be by touch-tone phone, fax or a phone call to a representative.
  • Know the rules. Different brokers have different rules for such processes as trading on margins.
  • Don't make investments on hearsay. All cautions that apply to traditional investing apply to the online medium. Watch out for get rich-quick schemes and otherwise too-good-to-be-true promises.
  • Never, ever make an investment based solely on what you read in an online newsletter or bulletin board posting, especially if the investment involves a small, thinly traded company that isn't well known.
  • Don't invest in small companies that don't file regular reports with the Securities and Commission, unless you are willing to investigate each company thoroughly and check out every statement about the company. For instance, get financial statements from the company and analyze them; verify the claims about new product developments or lucrative contracts; call every supplier to customer of the company and ask if they really do business with the company; and check out the people running the company and find out if they've ever made money for investors before.
  • Be wary of promises of quick profits offers to share "inside" information and promoters who use "aliases." Pseudonyms are common online, and some sales people will try to hide their true identify.
  • Be extra careful when considering any investment opportunity that comes from another country.

Wall Street Journal - Investment Errors

The Wall Street Journal of June 18, 1991 had an article on pages C1/C10 on Investment Errors and how to avoid them.

As summarized from that article, the errors are:

  • Not following an investment objective when you build a portfolio.
  • Buying too many mutual funds.
  • Not researching a one-product stock before you buy.
  • Believing that you can pick market highs and lows (time the market).
  • Taking profits early.
  • Not cutting your losses.
  • Buying the hottest {stock, mutual fund} from last year.