12 mistakes investors make

MANILA, Philippines – Investors commit one or more mistakes. They prove to be their own enemy, which may lead to dramatic impact on overall returns.

As part of its “Putting Investors First” campaign, the Chartered Financial Analysts (CFA) Institute listed down the “12 mistakes investors make.”

If you are starting on your journey toward financial freedom, check the list. If you have been investing too long and not yet seeing – despite several strategies applied – your investment gains, perhaps you are committing any of these mistakes, and it is time to review your investment plan.

CFA Institute, the global association of investment professionals, warned individual investors to be cautious in their investment decisions to avoid “these seemingly simple, yet impactful missteps.”

1. No investment strategy

Every investor should form an investment strategy that serves as a framework to guide future decisions. A well-planned strategy takes into account several important factors, including time horizon, tolerance for risk, amount of investable assets, and planned future contributions.

2. Invest individual stocks instead of a diversified portfolio of securities

Investing in an individual stock increases risk versus investing in an already-diversified mutual fund or index fund. Investors should maintain a broadly diversified portfolio, incorporating different asset classes and investment styles. Failing to diversify leaves individuals vulnerable to fluctuations in a particular security or sector.

3. Investing in stocks instead of in companies

Investing is not gambling and should not be treated as a hit-or-miss proposition potential. Analyze the fundamentals of the company and industry, not day-to-day shifts in stock price.

4. Buying high

The fundamental principle of investing is buy low and sell high. Others at risk for “buying high” are those who follow investment fads, buying the “popular” stocks of the day. Typically, these investments become fashionable for brief periods, leading many to invest at the height of a cycle or trend – just in time to ride it downward.

5. Selling low

The flip side of the buy-high-sell-low mistake can be just as costly. Keep in mind that not every investment will increase in value and that even professional investors have difficulty beating the index in a given year. Always have a stop-loss order on a stock. It’s far better to take the loss and redeploy the assets toward a more promising investment.

6. Churning your investments

Too frequent trading cuts into investment returns more than anything else. A study by two professors at the University of California at Davis examined the stock portfolios. The study found that without transaction costs, these investors received a 17.7% annualized return, which was 0.6% per year better than the stock market itself.

But, after transaction costs were included, investors’ returns dropped to 15.3% per year, or 1.8% per year below the market. Again, the solution is a long-term buy-and-hold strategy, rather than an active trading approach.

7. Acting on ‘tips’ and ‘sound bites’

Listening to the media for their sole source of investment thinking, rather than pursuing a professional relationship with an adviser is a far too common investor mistake. While breaking news and “insider tips” may seem like a promising way to give your portfolio a quick boost, always remember you are investing against professionals who have access to teams of research analysts.

8. Paying too much in fees and commissions

Incredibly, investors are often hard-pressed to cite specifics on the fee structure employed by their investment service provider, including management fees and transactions costs. Investors should, as a precondition to opening an account, make sure they are fully informed as to the associated expenses that accompany every potential investment decision.

9. Decision-making by tax avoidance

While individuals should be aware of the tax implications of their actions, the first objective should always be to make the fundamentally sound investment decision. Some investors, rather than pay a large capital gains tax, will allow the value of shares in a well-performing stock to grow so large it accounts for an inordinate percentage of their overall portfolio.

10. Unrealistic expectations

It is important to take a long-term view of investing and not allow external factors cloud actions and cause you to make a sudden and significant change in strategy. Comparing the performance of your portfolio with relevant benchmark indexes can help an individual develop realistic expectations.

11. Neglect

Individuals often fail to begin an investment program simply because they lack basic knowledge of where or how to start. Likewise, periods of inactivity are frequently the result of discouragement over previous investment losses or negative growth in the equities markets.

12. Not knowing your real tolerance for risk

Keep in mind that there is no such thing as risk-free investing. Determining your appetite for risk involves measuring the potential impact of a real dollar loss of assets on both your portfolio and your psyche. In general, individuals planning for long-term goals should be willing to assume more risk in exchange for the possibility of greater rewards. However, do not wait until a sudden or near-term drop in the value of your assets to conduct an evaluation of your level of tolerance for risk.

‘Putting Investors First Month’

The CFA Institute dubbed the month of May as “Putting Investors First Month.”

CFA Society Philippines will host the Philippine Retail Conference on Saturday, May 16, from 8 am to 5:30 pm at SMX Convention Center, SM Aura, Taguig City.

The conference aims to increase the financial to increase the financial knowledge of individual Filipino investors in today’s dynamic market.

With the theme “Secure Your Future Now,” the conference will highlight the key principles and practices that will help individual investors reach their retirement goals,” April Tan, president of CFA Society Philippines said.

By supporting Putting Investors First Month, CFA Institute wants to inspire the community to make real impact and foster a market environment where investors can thrive, said CFA Institute President and Chief Executive Officer Paul Smith.

“We aspire to build and lead the investment management profession. To do this, we must continue to stand together for what is right, and in investors’ best interests. All investors have the right to be served by professionals who act as stewards of their savings,” Smith said. –

Got a question about personal finance? Tweet @rapplerdotcom or email us at business@rappler.com. – Rappler.com

 

Careless investor concept image from Shutterstock