Thrifty Thinking: Mistakes Every Investor Makes

Thinking you can “Time the Market” is just one of the five biggest mistakes investors make when it comes to their portfolios, according to Peter Mallouk, JD, MBA, CFP.
 
“The evidence is overwhelming that market timing does not work. Part of protecting yourself from this mistake is recognizing it,” says Mallouk who has been rated the #1 Independent Financial Advisor in America by Barron’s in 2014 and 2013 (see this weekend's article) and his company, the #1 Independent Wealth Management Firm in America by CNBC in 2014.
 
His new book, The 5 Mistakes Every Investor Makes and How to Avoid Them (Wiley, August 2014) reveals the common and critical mistakes that investors make, why they make them and how to avoid to them. After understanding these land minds and pitfalls he provides a sensible framework for creating a winning investment portfolio with a step-by-step 10-point plan.
 
“Corrections are going to happen. Bear markets are going to happen. Bad things happen. If you are in cash and the market goes up, you may have permanently lost the opportunity to capture the upside. Yes, it may go back down, but will it go back to that lowest level? Maybe, maybe not. If it doesn’t go back down to that level, the investor sitting in cash will never be able to capture that return again,” says Mallouk.

Common mistakes include:

• Market Timing: There are thousands of investment managers who claim to be able to market time – some famous, some not – but they have one thing in common, none of them can do this effectively or repeatedly. The research shows that pros can’t do it. The odds are pretty high that you, your buddy, or your advisor can’t do it either.
• Active Trading: Active traders routinely underperform the market. The idea that smart people can trade stocks actively to improve performance is unfounded. Fees, taxes, and underperformance are guaranteed and expensive.
• Misunderstanding Performance and Financial Information: A large part of financial information that investors encounter is damaging or disingenuous. For investors to protect themselves from taking action based on it they must fully understand how reference sets work, how performance data can be misleading, view financial news with skepticism, and develop a skill for filtering out the noise.
• Letting Yourself Get in the Way: Ultimately it is our own behavior that does us in. The key to dodging the pitfall is to be aware of what your instincts are telling you and recognize behavioral land minds such as: recency bias, negativity bias, mental accounting, loss aversion, anchoring, confirmation bias, overconfidence, and succumbing to fear, greed and herding.
• Working with the Wrong Advisor: If an advisor is the right choice for you, make the decision carefully. Understand the importance of custody and competence, and most importantly make sure your advisor has no conflict and follows the philosophy that makes the most sense for you.
• The Ultimate Mistake: It’s your money! You busted your butt for it, you saved it, and you preserved it. So long as you are not jeopardizing your financial security, enjoy yourself a bit, give away what you want to, and overall loosen up a bit and experience the fruits of your labor.