Home' Trinidad and Tobago Guardian : May 25th 2017 Contents When learning how to invest, it is important to learn from the best, but it also
pays to learn from the worst. These top 20 most common mistakes have been
compiled to help investors know what to watch out for. If any of these mistakes
sound familiar, it is likely time to meet with a fnancial adviser.
1. Expecting too much or using someone else's expectations Investing for the long term involves
creating a well-diversifed portfolio designed to provide you with the appropriate levels of risk and return
under a variety of market scenarios. But even after designing the right portfolio, no one can predict or control
what returns the market will actually provide. It is important not to expect too much and to be careful when
fguring out what to expect. Nobody can tell you what a reasonable rate of return is without having an
understanding of you, your goals, and your current asset allocation.
2. Not having clear investment goals
The adage, "If you don't know where you are going, you will probably end up somewhere else," is as true of
investing as anything else. Everything from the investment plan to the strategies used, the portfolio design,
and even the individual securities can be confgured with your life objectives in mind. Too many investors
focus on the latest investment fad or on maximizing short-term investment return instead of designing an
investment portfolio that has a high probability of achieving their long-term investment objectives.
3. Failing to diversify enough
The only way to create a portfolio that has the potential to provide appropriate levels of risk and return
in various market scenarios is adequate diversifcation. Often investors think they can maximize returns
by taking a large investment exposure in one security or sector. But when the market moves against such
a concentrated position, it can be disastrous. Too much diversifcation and too many exposures can also
affect performance. The best course of action is to fnd a balance. Seek the advice of a professional adviser.
4. Focusing on the wrong kind of performance
There are two timeframes that are important to keep in mind: the short term and everything else. If you
are a long-term investor, speculating on performance in the short term can be a recipe for disaster because
it can make you second guess your strategy and motivate short-term portfolio modifcations. But looking
past nearterm chatter to the factors that drive long-term performance is a worthy undertaking. If you fnd
yourself looking short term, refocus.
5. Buying high and selling low
The fundamental principle of investing is to buy low and sell high, so why do so many investors do the
opposite? Instead of rational decision making, many investment decisions are motivated by fear or greed.
In many cases, investors buy high in an attempt to maximize short-term returns instead of trying to achieve
long-term investment goals. A focus on near-term returns leads to investing in the latest investment craze
or fad or investing in the assets or investment strategies that were effective in the near past. Either way, once
an investment has become popular and gained the public’s attention, it becomes more diffcult to have an
edge in determining its value.
6. Trading too much and too often
When investing, patience is a virtue. Often it takes time to gain the ultimate benefts of an investment and
asset allocation strategy. Continued modifcation of investment tactics and portfolio com- position can not
only reduce returns through greater transaction fees, it can also result in taking unanticipated and
uncompensated risks. You should always be sure you are on track. Use the impulse to reconfgure your
investment portfolio as a prompt to learn more about the assets you hold instead of as a push to trade.
7. Paying too much in fees and commissions
Investing in a high-cost fund or paying too much in advisory fees is a common mistake because even a small
increase in fees can have a signifcant effect on wealth over the long term. Before opening an account, be
aware of the potential cost of every investment decision. Look for funds that have fees that make sense and
make sure you are receiving value for the advisory fees you are paying.
8. Focusing too much on taxes
Although making investment decisions on the basis of potential tax consequences is a bit like the tail wagging
the dog, it is still a common investor mistake. You should be smart about taxes---tax loss harvesting can
improve your returns signifcantly—but it is important that the impetus to buy or sell a security is driven by
its merits, not its tax consequences.
9. Not reviewing investments regularly
If you are invested in a diversifed portfolio, there is an excellent chance that some things will go up
while others go down. At the end of a quarter or a year, the portfolio you built with careful planning
will start to look quite different. Don't get too far off track! Check in regularly (at a minimum once a year)
to make sure that your investments still make sense for your situation and (importantly) that your portfolio
doesn't need rebalancing.
10. Taking too much, too little, or the wrong risk
Investing involves taking some level of risk in exchange for potential reward. Taking too much risk can lead
to large variations in investment performance that may be outside your comfort zone. Taking too little risk
can result in returns too low to achieve your fnancial goals. Make sure that you know your fnancial and
emotional ability to take risks and recognize the investment risks you are taking.
For more information, please consult http://www.cfainstitute.org/investor/
The information contained in this piece is not intended to and does not provide legal, tax, or investment
advice. It is provided for informational and educational use only. Please consult a qualifed professional for
consideration of your specifc situation.
Some of this content originally appeared in the article, “The 12 Most Common Mistakes Investors Make” (2008).
Reproduced with the permission of the CFA Institute
Look out for 10 more tips in next BG 1st June, 2017
TIPS FOR AVOIDING THE TOP 20
COMMON INVESTMENT MISTAKES
by Robert Stammers, CFA, Director, Investor Education
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