5 Warning Signs of Bad Investing
In my day to day interaction with clients, as well as in comments I read from investors, I've observed many warning flags of underachievement. I've whittled these down to the top five signs you, or someone you know may be throwing money away, and here they are.
#5 - Braggers
Perhaps it's the line of work I'm in, but I always seem to end up in conversations that pretty much center around the investing brilliance of the person I am having the conversation with. They boast of a stock they bought that doubled in price, or go on and on about the superiority of their high dividend stocks. BP would be one such stock. Some of these conversations occur with potential clients. In almost every case, when I examined the portfolio as a whole, it was revealed that they significantly underperformed comparable indexes. It appears that braggers tend to remember their winners, and just sweep their losers under the nearest rug. Guess those that can, do, and those that can't, brag.
#4 - Investment Porn Addicts
Staying on top of the market may seem like the right thing to do, but it's not. Rather like trying to stay on your diet by reading Bon Appetit, plugging into financial media is an exercise in self-sabotage. So, if you are watching Cramer, subscribing to market newsletters, or using the latest market model with all of the best technical and fundamental analysis out there, you are probably underperforming. I see this with depressing regularity in my practice.
#3 - Emotional Types
Investing can be an emotional thing for everyone, and the more emotions you use, the worst your performance is likely to be. Want to know if you're one of those people? Try comparing your allocation to stocks at the end of 2007 to where you are today. If your allocation is more than five percentage points lower in stocks today, you probably took too much risk in good times and too little risk after the market plummeted. That means you are wired to buy high and sell low, which is a human trait of investing.
#2 - Big Spenders
How much are you paying in total fees? When people don't know, they are usually being taken advantage of. Morningstar's own study found that costs were a better predictor of performance than their own star rating. Do you know how much your advisor is making? What's your average expense ratio? Have you estimated the hidden costs of your portfolio such as those for fund turnover? There's an old saying that if you have to ask how much something costs, you probably can't afford it. Investing is one area where that adage gets turned on its ear. If you don't know how much you are paying in total fees, maybe because you haven't asked, you are probably a big spender.
#1 - Losers
If you consider this the post-crash market, then there is a flaw in your considering. Compare your portfolio value to the pre-crash highest year-end close ever on December 31, 2007. A 60 percent equity and 40 percent fixed income portfolio is within 2.2 percentage points of that all time high year-end close. That's using low cost index funds, and rebalancing once a year. If you're still huddled in your stock market bomb shelter, you're probably in this category.
Did I say there were five warning signs? Well, if you didn't see yourself in any of the first five, then that's probably the biggest warning sign of all. Denial may protect us against emotional pain, but not economic losses. Humility, on the other hand, is a key trait for investment success.
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