Most of us make mistakes, it is great that we eventually learn from the mistakes. In an article Terry Cain asked financial advisors the common mistakes or errors people tend to make in regards to their portfolios.
- Paying too much attention to Your Investments.
Years ago, a story was heard that a reasonably wealthy individual was convinced to buy some stock. He bought the safest security Bell or AT&T. The company was heavily regulated, had a monopoly and was a company people bought for its dividends. The gentleman use to phone his broker everyday and ask for the price and when it when up 25 cents was happy and when it went down 25 cents thought about selling. The stock had a trading range of $5 dollars a year, no one bought it for capital gains in the year. Eventually the individual was convinced to sell and stick with interest rate products.
You can spend too much time on your investments, think about the size of your portfolio and your income. If it generates the same as your day job, perhaps considering retiring or working less. If the income is less than you day job, buy things you follow on a regular basis to know when you expect the downturn is coming. Then you can do things for a defensive (not to lose money) as well as offensive (make money).
2. Chasing a Hot Investment
At some point there is a hot investment, sectors which have gone up 100% and more and you look at your portfolio doing 10% and want to invest in that sector. Knowing what goes up typically comes down, if you chase the hot investment do so with money you can lose. Perhaps use your dividends or interest payments to buy then you are protected and the bulk of your funds are doing what they are suppose to do. Earning money for you.
Being Afraid to Take a Loss
It is seemingly easier to do this on a self directed portfolio, but if you own a company that is losing money, look at alternatives. You bought the company for a reason, go back to it and see if that is the reason to continue to hold. If not sell, wait and buy a quality company when the price declines. When the price increases you are better off.
Assuming that Bigger Companies are Better
The easiest method to change your mind is look at the Fortune 500 from 25 years ago, 15 years ago and last year. The names change at the top of the list, some of the companies you will not know or remember. Unless you buy an utility type company, most companies change over the years and this is why as much as you begin to really like a company, a review each year to see if alternatives should be examined is a good idea.
Misunderstanding Diversifications
Many people buy funds and ETFs including the writer, however some funds and ETFS follow the same type of companies. That can be great while they are doing well, but understand if you were attempting to diversify, you have actually become more focused on one sector. Often times, reviews by portfolio managers are free, so if you are doing all the work ask if you are really diversified?
Pursuing Yield above all else
If you look at the companies which pay higher yields, 2 or 3 times higher than treasury rates, you have to wonder how sustainable they are? How does the company generate the cash to pay the dividends and grow their business?
Linking to dividend paying stocks, one of the reasons the writer likes them is they are relatively easy to analyze. Is the company profitable? are their dividends sustainable? what needs to change? If you are reasonably happy with the answers, then there is little to do but collect the sustainable dividend from the profitable company. If there is a major change look at alternatives.
There are more questions than answers, till the next time – to raising questions.
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