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Avoid These 3 Most Common Pitfalls of Investing

| January 09, 2017

We are human, which means we have emotions. Despite the fact we all strive to make good, rational decisions all of the time, the fact that we are human makes this virtually impossible. When it comes to investing, you have one of two emotions working in you at all times: fear or greed. Unfortunately, when you let these manage your portfolio you will always trail the market. Which could be why the average investor made a mere 2.11% annualized return over the 20 year period ending in 2015 versus stocks that made an average return of 8.19%.1

The first pitfall we commonly see is failure to look at your investments as a whole. Mental accounting or segmenting certain dollars and investments for certain things is something we all do. This can be extremely damaging to your investments. A few months ago we analyzed a couple’s investments that were in danger due to this. They had set aside “safe money” that was in a fixed account. The problem was that they were taking income from investments that were very volatile at the same time causing constant losses. After running the analysis, this couple was doomed to run out of money in a best case scenario of 15 years. However, by simply building an overall income plan and positioning all of their money around this plan, they developed the chance of their money outlasting them. Bottom line: all of your investments and financial resources need to be working together and allocated to reach your goals.

The second failure we often see is the lack of monitoring. Investing is not a static process. Just think about how much has changed since our election in November within our own country, not to mention the world. Or even more - is your situation the same that it was 10 years ago, 5 years ago or even last year? Too often we see investors who have come to us that have just sat back and waited to see our markets play out. You cannot wait! Just think about the early 2000s. There were some companies that never saw their stock prices reach their highs again. And worse, what if you need to take retirement income during a downturn in the market? If you are selling shares to supply yourself income, you can never make up the losses they incurred. You must have a disciplined process to re-balance and possibly reallocate your portfolio on a consistent basis to be ready for the changes of life, the world changes which impact our markets, and the needs you could have.

Last, but definitely not the least important, is the risk of interrelationship between your investments. You may have heard this analogy before, but just imagine your two favorite restaurants. Now imagine your two favorite dishes from these restaurants. If you were asking me, I love Chef Point Café’s blackened chicken in an Alfredo sauce and a little brunch restaurant we stop at on our way to the mountains where I can get enchiladas verde with eggs. However, if I mixed the two dishes in one big bowl the taste…well…I don’t even want to imagine. Too often this is exactly what happens to an investment portfolio. Last year we saw this at its worst. A family came to us believing that their investments were completely diversified. Yet when we performed an “x-ray” fund analysis we found this not to be the case at all. Every single fund they owned contained many of the same stocks, which meant their risk level was way too high. And worse, most of these stocks were overpriced. A portfolio should not only contain individual investments that perform well on their own, but these investments should also correlate well with the others in the portfolio.

Even though we all want our cake and to eat it too, it simply can’t happen. As Aaron always says, you get the return you deserve. The crucial thing to remember is that there is not only such a thing as too little risk, but there is also such a thing as too much risk. It is extremely important you have a plan in place that fits your unique situation, that you monitor this plan and that you know the inherent risk you are taking. It is the New Year! Get your house in order and your investments, too!

1. Blackrock. 2016. Investing and Emotions.