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Admit it . . . you're not perfect.Still, it would be nice to learn from someone else's mistakesfor a change, or at least avoid making the same mistakes twice.With that in mind, here are 10 of the most common mistakes made byastute (and some not-so-astute) investors. Feel free to tally uphow many you've made. If you tick off fewer than two, consideryourself a pro; three to five, you're an expert; six to eight,you need some help; more than eight, don't just sitthere . . . rethink your actions! Read on tosee how you fare.
1. Love me, love my stock. Everyone's heard theone about the stock inherited from grandma that began as a fewmeasly shares and, through dividend reinvestment (and divineneglect), is now worth hundreds of thousands of dollars. The stockshares are like the Energizer bunny . . . theyjust keep going and going, and presumably they always will. Or willthey?
Whether you're holding shares of a tobacco company, asoft-drink purveyor or a software developer, perhaps you shouldconsider selling off a few of those wonderful shares anddiversifying your portfolio a bit. (Before you do, however, be sureto check with your tax advisor.)
2. Hot fund, cold fund, 1, 2, 3. If you'reseeking a few good funds and have set your sights on a few of lastyear's hottest ones, look before you leap. In many cases, lastyear's top performers will be funds of similar style and marketsector, which means they'll probably all move in the samedirection--not bad if that direction continues to be up, but no funif things go the other way. That old saying, "Past performanceis no indication of future returns," is especially meaningfulhere, as the performance of investments over time shows aregression toward the mean. A hot fund could cool off just asyou're getting into it.
Instead, consider looking for fund managers with good long-termtrack records whose funds are out of favor and who aren'twinning any popularity contests. By selecting funds that are out ofsync with the current best and brightest, you'll have thechance to get in early on a trend. Of course, you may get in tooearly, as did many investors who bought international funds in1997. While their investments underperformed investing in largeU.S. companies last year, 1998 has gotten off to a great start forthese funds; many are currently outperforming many U.S. large-capstock funds.
3. Going for broke. Buy low, sell high. Howdifficult can that be? For many of us, it's almost impossible.It seems that lots of folks can tell you when to buy a stock (yourbrother-in-law, your golf buddy, even your broker), but few cantell you when to sell. See if this sounds familiar: You buy sharesin a stock you like and the price begins to rise. It continues torise until you have a profit of more than 20 percent. You'renow faced with a classic dilemma: Do you take the profit and run?Unfortunately, no one has a crystal ball. You may have apharmaceutical company with the cure for cancer on your hands, butthere's no way to know for sure.
One possible strategy? When buying, set a target price at whichyou'd be happy to sell. When your shares get there, reevaluateyour decision to see if you'd buy the stock anew at the higherprice. If not, sell, sell, sell, and don't lookback . . . unless the price falls to a pointwhere you want to pick it up again.
4. Better safe than sorry? Recently, a new clientcame in to see me. About to retire, he wanted to be sure he couldmaintain his lifestyle with his current investments. As he pulledout his retirement plan statement, his whole demeanor changed."I can't believe I left all this money in a money marketfund for the past six years," he said. "I could have doneso much better if only I had invested a little of it in the stockmarket. I was just so afraid of losing it that I didn't doanything."
Certainly, this investor was justified in his fear of stockmarket fluctuations. There's always some measure of risk wheninvesting in stocks and a chance you'll lose money.Unfortunately, however, thanks to the bite taken by inflation andtaxes, you can also lose purchasing power in money market funds andother similar investments. Our investor didn't realize hismoney market fund was neither insured nor guaranteed by the U.S.government. Further, there's no assurance such a fund willmaintain a stable net asset value of $1.
The moral of the story? To retire in the style to which he'saccustomed, our investor may be forced to work longer or to investmore aggressively than he might have had he included a partialinvestment in stocks in his portfolio from the start.
5. Over there . . . I think.Looking to diversify your portfolio into overseas markets? Manyfinancial professionals agree that investors can improve thelong-term performance potential of their portfolios by movingbetween 10 percent and 30 percent of their money into foreigninvestments. But is your fund truly invested across the water? Ifyou're considering a global fund, you may be missing the boat.International funds hold only foreign securities, while globalfunds invest in companies in the United States and overseas. So ifyou want to diversify into foreign markets alone, invest in aninternational fund.
You should also know foreign investing is subject to certainrisks, such as currency fluctuations and social, economic andpolitical changes, which may result in greater share pricevolatility.
6. I want my CNBC. What's the first thing you doin the morning? If you switch on CNBC, get your fix of The WallStreet Journal or check your stocks on the Internet before youpour your coffee, you might be obsessing over the stock market.It's true such diligence could lead to profits, but it couldalso lead to needless worry, panic and way too much trading.It's important to pay attention, but it's bad to be tooanxious.
7. Where do you want to gotoday . . . and tomorrow? If Bill Gateshadn't known where he wanted to go, he probably would haveended up somewhere else. The same goes for your portfolio. Ifyou're saving for a goal that's five, 10 or 20 years away,your reactions to the market's fluctuations will likely bedifferent from those of someone whose focus is on speculation andshort-term gains. If the lofty levels of stocks have you spooked,consider dollar-cost averaging into investments you'd like toown. By making smaller purchases on a consistent schedule, youcould be in a better position to take advantage of the market'sfluctuations without a lot of headaches.
8. Know thyself. Many people don't know theirrisk tolerance. Ask yourself how you'd feel if you invested ina stock and two weeks later, only half of your investment was left.If you get sick just thinking about it, then maybe the stock marketisn't for you--at least when it comes to investment fads, hottips and initial public offerings. If you can't afford to losesome money, consider other investments.
9. Ain't nothin' like the real thing. Faceit: 20 percent average annual returns are not an inalienableright. The past several years have proved to be remarkable, butthat doesn't mean the bull will run forever. It alsodoesn't necessarily mean the market will crash and return tothe 6,000 point level. To paraphrase Rudyard Kipling, "He whokeeps his head keeps his sanity (and his wallet)." Babe Ruthhad one of the finest batting averages in history, and even hestruck out sometimes. So if you expect your portfolio to swing forthe fences every year, you'll probably end up disappointed.
10. Know where your advice is coming from. What kindof license does your financial advisor hold? Has your registeredrepresentative received a bevy of customer complaints? If possible,speak with him or her in person or over the phone and get a feelfor his or her style. Make sure your advisor understands yourobjectives, and be honest about your goals and expectations. Toverify a potential advisor's experience, call the NationalAssociation of Securities Dealers Inc. at (800) 289-9999. Ifyou're considering a certified financial planner, call the CFPBoard of Standards Inc. at (888) CFP-MARK.
Lorayne Fiorillo is a financial advisor and first vicepresident of investments at Prudential Securities Inc. Pastperformance is no guarantee of future returns. For moreinformation, write to Lorayne in care of BIZ Experiences, 2392 MorseAve., Irvine, CA 92614.
