10 Common Investors Mistakes

Everyone makes mistakes, but knowing what can go wrong puts you one step ahead. Here are 10 common mistakes investors make. How many of them apply to you? Here’s where your investment manager can really add value.

No investment strategy. From the outset, 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.

Investing in individual stocks instead of in a diversified portfolio of securities. Investing in one or a few individual stocks increases your risk. 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.

However, it is also possible to over-diversify and own too many investment products − particularly if an investor has a modest portfolio. This unfocused approach will generate higher overall fees and is less strategic. The best course of action is to seek a delicate balance between the two. Often, this can best be done with the advice of a professional or trusted advisor.

Investing in stocks instead of in companies. Investing is not gambling and shouldn’t be treated as a hit-or-miss proposition. When you invest, you assume a reasonable amount of risk to help finance enterprises you believe have positive long-term growth potential. Before buying a stock, analyze the fundamentals of the company and industry, and make sure it has basic corporate governance protections. You shouldn’t look at day-to-day shifts in stock price. Buying a particular stock because it looks like it's going up or because you like a company’s product or service is not a sound investment strategy.

Buying High. The fundamental principle of investing is buy low and sell high. So why do so many investors end up doing the opposite? The two main reasons are performance chasing and following investment fads. Just because a stock, a fund or an industry has done well in the past, is no indication of future performance. Similarly, buying a popular stock often leads to investing at the height of a cycle or trend – just in time to ride it downward.

Investors often end up buying high and selling low because they think short term instead of maintaining focus on their long term investment strategy. This is tactical, not strategic investing. Investors should not draw conclusions from the past but always look critically at the prospects for future performance past.

Selling Low. When a stock goes down, too many investors are slow to cut their losses and sell -- they hold on hoping to regain at least some of what they have lost. Smart investors realize that may never happen. Not every investment will increase in value and even professional investors have difficulty beating the S&P 500 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.

Churning your investments. Trading too frequently cuts into investment returns more than anything else. A study by two professors at the University of California at Davis examined the stock portfolios of 64,615 individual investors at a large discount brokerage firm between 1991 and 1996. 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. The solution is a long-term buy-and–hold strategy, rather than an active trading approach.

Acting on “tips” and “soundbites.” 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. Too many investors use the media as their sole source of investment thinking instead of pursuing a professional relationship with an advisor. Seasoned investors gather information from several independent sources and conduct their own proprietary research and analysis before making an investment decision.

Just because information is new to you doesn’t mean it's really new. You can be sure that if you’ve heard it, so have many others. That means the information is likely already factored into the market price.

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. Before they open an account, investors should make sure they are fully informed about the expenses associated with every potential investment decision. To really gauge your overall performance, adjust all your investment returns for fees and expenses paid.

Decision-making by tax avoidance. While you should be aware of the tax implications of your actions, the first objective should always be to make the fundamentally sound investment decision. Some investors, to avoid capital gains tax, will allow the value of shares in a well-performing stock to grow to account for an inordinate percentage of their overall portfolio. Similarly, don’t hold on to a security past the one-year purchase date simply to take advantage of a lower capital gains rate. If you are concerned about tax, find a good tax advisor – don’t let it change your investment decisions.

Unrealistic expectations. Expecting returns of 20-25% annually can only result in disappointment or excessive risk-taking. According to Ibbotson Associates, the compound annual return on common stocks from 1926-2001 was 10.7%, but only 4.7% after taxes and inflation. Returns on long-term bonds over the same time period were 0.6% after taxes and inflation. It is important to take a long-term view of investing and not allow external factors to cloud actions and cause you to make a sudden and significant change in strategy.

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. To be certain, investors should continue investing in every market − albeit through different investment vehicles − as well as establish a mechanism to make regular contributions to their portfolios. Investors should also regularly review their holdings to ensure they are adhering to their overall strategy.

Not knowing your real tolerance for risk. There is always risk in investing. Determining your appetite for risk involves measuring the potential impact of a real dollar loss of assets on both your portfolio and psyche. You should be realistic and evaluate your level of risk tolerance and invest accordingly. In general, individuals planning for long-term goals should be willing to assume more risk in exchange for the possibility of greater rewards.



Content adapted from CFA Institute

Corporate Short-Term Bonds A Safe Play

If you were smart enough to have invested during the dark days of 2008's fourth quarter and 2009's first quarter congradulations. Now what? Well, one alternative is to just let it ride. The market is always forward looking and all leading economic indicators remain high. If you have a long-term plan then stick to it.

But like all markets nothing ever goes straight up or down so you may want to protect a large percentage of your gains by moving into something more conservative. And if you liquidated your stock investments during those dark days now's probable not the time to jump back in. You'd be better off hoping for another 5-8% pull back. Whatever your situation one conservative alternative to doing nothing or hiding your money under the mattress is to invest in Short-Term (no-load)Bond Funds.

Steven Huber, co-manager of the T. Rowe Price Strategic Income fund, says corporate bonds - domestic and foreign - are a good conservative investment within a improving economy and near-term ultra low interest rate enviorment.

Here's a list of some Short term: Bond Funds with the best performance in their category for the last 3 months.

My favorites for those who want no risk but seek yields above the Mutual Fund Money Market Funds (MMF) less than 1/2% yield is to just move your money to an FDIC insured US bank MMF which currently pay just over 1%. It's a pittance return but that's still a 50% increase over Mutual Fund Money Market Funds which are not FDIC insured. So, it's more yield, less risk.

Individuals with more than $3,000, willing to take a tiny bit more risk, should consider my favorite four no-load, extra conservative Bond Funds, from Vanguard:

#1)Vanguard Short Term Bond Index Fund - Investor Shares Class - VBISX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________101%
Total Portfolio Assets ($B) _____________$10.5
Minimum Investment ____$3,000

#2) Vanguard Intermediate Term Bond Index Fund - Investor Shares Class - VBIIX
Annual Management Expense Ratio _____0.18%
Annual Portfolio Turnover _____________86%
Total Portfolio Assets ($B) _____________$3.2
Minimum Investment ____$3,000

#3) Vanguard Short Term Federal Fund - Investor Shares Class - VSGBX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________89%
Total Portfolio Assets ($B) _____________$8.6
Minimum Investment ____$3,000

#4) Vanguard Inflation-Protected Securities Fund - Investor Shares Class - VIPSX
Annual Management Expense Ratio _____0.20%
Annual Portfolio Turnover _____________28%
Total Portfolio Assets ($B) _____________$19.3
Minimum Investment ____$3,000

#5) Vanguard Short Term Investment Grade Fund - Investor Shares Class - VFSTX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________49%
Total Portfolio Assets ($B) _____________$20.4
Minimum Investment ____$3,000

#6) Vanguard GNMA Fund - Investor Shares Class - VFIIX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________63%
Total Portfolio Assets ($B) _____________$32.6
Minimum Investment ____$3,000

#7) Vanguard Intermediate Term Investment Grade Fund - Investor Shares Class - VFICX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________48%
Total Portfolio Assets ($B) _____________$9.6
Minimum Investment ____$3,000

Investment research overwhelmingly shows that lower cost fixed income funds tend to yield higher bond investing returns.
The fixed income asset market is no place for you to try to beat the market and to attempt to get higher returns by picking your own bond. Even professional fixed income asset market money managers do not beat the bond market. The higher the mutual fund company expenses, the lower the net returns to individual investors.

Why Not Long Term Treasuries Bonds Now?
If Treasuries have been such a success story, why not stick with what’s worked? Here’s why: Because they were too successful. When investors rushed into the safe arms of a U.S. government guarantee last in the fourth quarter of 2008, Treasury prices soared and yields evaporated.

Yields have been slowly rising on long-term government bonds. Between the Federal Reserve’s recession-fighting rate cuts and the panicky investors flooding the market, Treasury yields are so low that prices have nowhere to go but down. Bond prices and yields move in opposite directions which is the primary reason I'm suggesting short-term investment grade corporate bonds. “For the most part, today’s Treasury market is a place where the average investor can only lose money,” says 80-year-old Ben Jacoby, co-founder of Brinton Eaton Wealth Advisors and a veteran of the long bear market of the 1970s.

Going forward, the picture looks bleak for Uncle Sam’s bonds. To pay for the gargantuan stimulus package, the government will issue even more of them, flooding the market. “Yields will have to rise for those bonds to find buyers,” says Dan Fuss, vice chairman of fund company Loomis Sayles, and that will depress the value of existing bonds. Now that investors may have regained their appetite for stocks, it’s entirely possible that they’ll dump bonds, further driving up supply. Another threat to bond values is inflation, which, by reducing the future value of bond yields, also puts downward pressure on prices.

You might think that if the stimulus spending proves inflationary, you should take a look at Treasury inflation-protected securities, or TIPS. But those have low yields too, and Fuss isn’t upbeat about their prospects. “It will be a while before there is any inflation to protect yourself from,” he notes. Still, everyone agrees as the economy continues to improve inflation will return. The price of Oil has already doubled from 2008's fourth quarter low.

Investing : Iraq vs. California Bonds

I have never considered the relative merits of an Iraqi bond versus a California state bond, but a reader of my toolbox for finance article, Military Entitlements Are Impoverishing Us, forwarded me an article from the Boston Globe on investing. This short excerpt from the Boston Globe makes an alarming comparison that indirectly makes one of my articles points. The piece is about two intrepid buyers of really scary emerging markets bonds from places like Venezuela, Dubai, Pakistan and Iraq. The comments about California and Iraq are most amazing.

Michael O’Hanlon, who tracks indicators of progress for the Brookings Institution’s Iraq Index, said that “Iraq has continued its remarkable trajectory of improvement.’’

“It is still fairly violent by Mideast standards, but many countries in places like South America have higher overall levels of violence now from crime,’’ he said.

Traditional Wall Street investors have taken note. Iraq is now considered a safer bet than Argentina, Venezuela, Pakistan, and Dubai — and is nearly on par with the State of California, according to Bloomberg statistics on credit default swaps, which are considered a raw indicator of default risk.

“Compared to California, I’d rather bet on Iraq,’’ [Emerging market bond investor Saleh] Daher said. “Iraq is a country where there are still bombs going off and people getting murdered, but they are less indebted than the United States. California is likely to have more demands on its resources, and there is no miracle where California is going to have more revenue coming out of the sky. Iraq has prospects for tremendously higher revenues, if they can manage to get their act halfway together, which they seem to be doing.’’…

America has wasted a fortune to invade and occupy a nation that was no military treat to the US nor did it have WMDs. Now America Taxpayers are forced to spend another fortune to maintain security and rebuild Iraq at no cost to Iraq. We got the world to forgive Iraq debt as we piled up debt. Iran loved the fact taxpayers paid the cost of eliminating their number one enemy, Saddam. Now the Middle East, Oil Sheiks enjoy $85 dollar oil and the protection of the American taxpayer military, thanks to their Uncle Sam.

The cost of Iraq and Afganistan occupation nearing ONE TRILLION DOLLARS.
Now this astronomical number doesn't include the cost of a life time of medical and psychiatric care nor disability payments for wounded soldiers.

It's time the US concentrate more on its Economic Might, if it wishes to keep its Military Might.

Brand American Rising?

Every now and then you come across a little piece of news that has great importance, yet is under reported in today's news sensation world. Here is such news. If I'd heard it from a friend I'd say that's not possible (not that I'd expect the USA to be in the bottom 10). What does this have to do with investing? Peoples attitudes about countries affect their desire to invest in the companies of that country.

Why the change? Why does the ranking shake out this way?

NEW YORK, Oct. 5 /PRNewswire-USNewswire/ -- Brand America is now ranked #1 by global citizens, according to the GfK Roper Public Affairs & Media, a division of GfK Custom Research North America. Results from the 2009 Anholt-GfK Roper Nation Brands Index(SM) (NBI), which measures the global image of 50 countries, show the United States taking the top spot as the country with the best overall brand, up from seventh last year.

"What's really remarkable is that in all my years studying national reputation, I have never seen any country experience such a dramatic change in its standing as we see for the United States in 2009," explains Simon Anholt, NBI founder and an independent advisor to over a dozen national governments around the world. "Despite recent economic turmoil, the U.S. actually gained significant ground. The results suggest that the new U.S. administration has been well received abroad and the American electorate's decision to vote in President Obama has given the United States the status of the world's most admired country."


Anholt-GfK Roper Nation Brands Index(SM)
Overall Brand Ranking
(Top 10 of 50 Nations)

2009
1 United States
2 France
3 Germany
4 United Kingdom
5 Japan
6 Italy
7 Canada
8 Switzerland
9 Australia
10 Spain, Sweden (tie)

Source: 2009 and 2008 Anholt-GfK Roper Nation Brands Index(SM)

"This improved perception of the U.S. is not only in the area of Governance, there are improved perceptions for People, Culture and even Tourism of the United States," adds Xiaoyan Zhao, Senior Vice President and director of the NBI study at GfK Roper Public Affairs & Media. "While most nations' reputation does not undergo major change from year to year, the U.S. has clearly bucked the trend. What's key for the U.S. and other world's leading nations is to strike while the iron is hot and develop focused policies and communication that draw businesses, financial investors and tourists -- in order to help lift their national economies and their global credibility."

The NBI is based on a global survey in which people from across 20 major developed and developing countries are asked to rate each nation in six categories: Exports, Governance, Culture, People, Tourism and Immigration/Investment. The NBI ranking is based on the average of these six scores.

Turning to the rest of the NBI rankings, mostly the same countries are in the top ten as in 2008 - but also with some shifts in position. France again captured second place overall, while Germany and the United Kingdom fell to third and fourth, respectively. Japan (5th) and Italy (6th) did not shift rankings from 2008. However, Canada lost ground, slipping from fourth last year to seventh in 2009. Switzerland, Australia, Spain and Sweden round out the top 10.

Other major movers in the overall ranking include several developing countries - such as China, which climbed several spots from last year to 22nd in 2009.

This year's NBI study also includes questions on the impact the global economic crisis is having on people's opinions and perceptions towards the nations tracked. Top-line results from this area will be released late fall 2009.

To request a copy of the Anholt-GfK Roper Nation Brands Index(SM) (NBI) 2009 Highlights report or for more information on the Anholt-GfK Roper Nation Brands Index(SM) (NBI) and Anholt-GfK Roper City Brands Index(SM) (CBI), please visit www.gfkamerica.com and/or www.simonanholt.com.

About the Anholt-GfK Roper Nation Brands Index(SM)

Conducted annually in partnership between independent advisor Simon Anholt and GfK Roper Public Affairs & Media beginning in 2008, the Nation Brands Index(SM) measures the image of 50 countries with respect to Exports, Governance, Culture, People, Tourism and Immigration/Investment. Each year, approximately 20,000 adults ages 18 and up are interviewed online in 20 core panel countries

Given the China economic success why do you think they only rank 22nd.?

Global Investing Webcast Sept. 9th

What's the forecast for the global economy?

If you asked Dr. Marc Faber, he'd probably tell you "mostly gloomy with scattered signs of boom."

There is hope out there for global investors. Dr. Faber believes global markets are entering a new world where demand is driven by developing countries.

In addition to publishing a monthly newsletter, The GloomBoomDoom Report, Dr. Faber is the author of Tomorrow's Gold: Asia's Age of Discovery. He is a memeber of the Barron's Roundtable which is a collection of investment industry titans. Dr. Faber is also one of the most sought-after speakers at investment conferences around the world.

Tune in and listen to Dr. Faber and U.S. Global Investors' CEO and chief investment officer, Frank Holmes, discuss the possibility of hyperinflation, the new role for gold and silver in a portfolio and where investors can find the best value in the world.

Still time to sign up.

Most investors know Dr. Faber. Frank Holmes is a fantastic guy too. I had the opportunity to meet Frank and hang out with him in the early 90's, at Investment Company Institute (ICI)conferences. He's a Canadian who purchased U.S. Global Investors mutual funds and investment advisor, when it was one gold fund run by a famous 70's and 80's Texas gold bug. The man was famous for writting Warren Buffet style shareholder messages about owning gold.

At the time of Franks late 80's purchase the 70's gold rush fear was dying, as the value of the dollar was rising. We've now had ten years of the opposite trend. Dr. Faber and Frank will no-doubt talk about the world economic drivers and American economy. I'm sure gold and commodities trends will be on the agenda too.

Steve Forbes son of Malcolm Forbes and the editor-in-chief of Forbes magazine always said we need a strong dollar and when gold gets above $400 an ounce, thats a bad economic sign. With gold once again pushing new highs near $1,000, I'm sure Steve would say that's a really bad sign. Not so bad for those who own gold bullion.

If you believe in global markets and have inflation worries you'll want to listen in on the webcast. It's free-----Frank is picking up the tab. See you there.

Here is some excellent free education at Window to Wall Street's website on the value of the Dollar vs. Oil trends.

Life Lessons of Lasting Investment Value

I'm not here to sell a product or service. I'm here to share the cumulative wisdom and mistakes I've learned over 38 years through Investment experience and education. No, I'm not going to get into my own stock picks. Yes, I'm going to provide advice of more lasting value with a much higher probable outcome of success. From time-to-time I do promise to provide readers with links to articles on specific stock recommendations and market forecast from people I regard as worth reading.

Here is five of my best investment advice...life lessons of lasting value:

Lesson #1: Invest in your education and a profession first. Yes, knowledge is power -not just in investing but in securing a job and career. It took me about 10 years to fully appreciate the wisdom of a fellow finance student at lunch in 1975. Five of us BBA's were discussing what stocks to buy and the market trends. I ask one older student, who was just listening and smiling, for his views. He replied, "Guys, the best investment you can make is not in a stock. The best investment we'll ever make is to finish our BBA degree's and secure job's that lead to a career. If you earn just $15.000 more per year and save that money in a simply no-risk FDIC insured bank account earning a measly 4.25% over your 40 year career you will have $1.5 million more money at age 65."

Lesson #2: Forget thinking you're going to turn coal into gold. I see many young people thinking they're going to take their $5,000 in life savings and turn it into $5 million by becoming a full-time day trader of stocks, options and foreign currency markets. Lots of things are possible but this is highly improbable. Anyone can claim anything on the wild-west internet with little fear of investigation or fines for false or unsubstantiated claims. Many people lose more than they make and if you have less than $100,000 my advice...forget it...read Lesson #1.

Lesson #3: Seek professional help. I've learned over the years that I'm worthless as a carpenter or mechanic. So I forget the do-it-yourself mentality and hire a professional to do it for me. If your business needs an accounting system interview your local CPA's (I'd pass on a bookkeeper). You need taxes done right? Interview your local H&R Block or CPA tax pros. Not happy with your current Insurance company or agent? Search on the internet for a local CLU and CPCU. You will not pay anymore for your insurance but you'll be assured of competence. Got a legal problem? Talk with a lawyer not your brother-in-law. So, when it comes to your investments seek a professional with experience. Talk with a locally Certified Financial Planner (CFP) or Charter Financial Consultant (ChFc) or A Certified Financial Analyst (CFA). Ask if they have a college degree with training in finance, accounting, Modern Porfolio Theory (MPT). Ask about the training and resources provided by their employer. Think about it folks, would you rather buy meat that is FDA inspected from a trusted name brand source or from a foreign vendor on a street corner?

Lesson #4: Get A Plan First...Choose Investments Second. First things first. You need to think beyond next month and next year. You need to think about what you want or need in your investment account values at age 65. Forget asking for a hot stock tip or about the best performing mutual funds of last year. You need a destination objective. You need a financial goal and a financial plan to reach that goal. No ideas? Then think, "how much can I or should I save monthly".

Lesson #5: Spend Less, save more and save now. Remember this simple rule. Achieving long-run financial health means saving as much as you can...as soon as you can. Saving just $350 more per month and earning an average return of just 4.5% (compounded monthly) over 25 years means you'll have an extra $194,275. Putting off saving for 5 years and you'll have $57,922 less in 25 years.

If you are investing you can earn much higher returns which could double the value of these dollars to you. But you need to understand markets often decline and no one can consistantly provide you with an early warning buy or sell system. So, you'll need to maintain a long term plan that forces you to invest more during market declines and purhaps less after major advances using a rebalancing system which a local CFP can explain in detail.

Extra Credit Reading Material

Financial Planner

BalanceTrack Free Financial Education Chapter 1-5

Financial Long-Run Planning. The process begins with assessing your current financial situation, determining what you want to achieve and building tailored made solutions to achieve your goals. Whatever goals you have set for yourself, your financial advisor can help you build a clear, concrete plan to help reach them. Your advisor will develop a personal financial plan based on your needs and careful analysis of your specific situation. Once completed, you and your financial advisor can work together to move forward on your plan.

“The best way to predict your future is to create it.”...Stephen Covey

WARNING: Many less experienced people tend to extrapolate out average returns of 9-10% claiming that's the average historical return. This has often been true but it's not always true -a big difference. No one considered the fact that the S&P 500 Index return could be a NEGATIVE 3.5% average annually return -as it has been over the last decade. After the 1929 Market Crash the market took about 20 years to return to that level again. Another major flaw in planning is using fixed high average annual returns compounded monthly over long periods to show how money invested can grow. Stock markets and stocks are not bank CD's that may compound returns daily or monthly. Stock markets fluxuate daily not compound daily. So, you'll need a professional with some college level finance training in probability and statistics analysis who can show you growth outcomes using "Monte Carlo Theory" and utilizing a historical data base of monthly market returns. This simulation analysis will show you a range of most probable outcomes over various time frames.