Investing mistakes you’re probably making

Successful investing is about controlling what you can

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How many mistakes can you make investing? There are so many ways to lose money investing in stocks and (these days, with interest rates poised to rise) even bonds; it’s hard to say what is the single biggest mistake. That would be whatever loses you the most money, which is usually hard to predict in advance.

Certified financial planner Paul Philip, president of Don Mills, Ont.-based Financial Wealth Builders Inc., believes the biggest mistake investors make is being “predictably irrational.”

Humans are not hard wired to make good financial decisions, Philip says. “We are emotional beings and are affected continually by the news around us. Most investors react exactly the opposite to what they should do when their investments inevitably fluctuate. They sell when they drop, are frustrated and upset, then eventually they get their confidence back and buy when markets have already recovered. Fear and greed are their overriding decision-makers. This is not good for long-term well being. Too many people live their investing lives like hamsters on a wheel, running faster and faster and getting nowhere.”

Successful investing is about controlling what you can, Philip says. “You can’t control what the market does, but you can control what you do in response. In my experience, a person’s returns depend less on whether they pick great investments than on whether they can manage their emotions.”

Patrick McKeough, Toronto-based publisher of The Successful Investor, The Wall Street Forecaster and the TSInetwork.ca web site says one of the mistakes that consistently costs investors money is “failing to consider conflicts of interest in anyone providing any kind of advice.”

Another mistake that McKeough is famous for noting is chasing stocks in the broker/media spotlight. “Our basic rule is to downplay or avoid stocks in the broker/media spotlight unless it’s a really good idea.” Thus, McKeough rarely recommends buying new issues. An exception is Google, which he didn’t recommend until a few years after its IPO, but is one “I do like even though it’s been in the limelight.”

Sandy Cardy, formerly a tax and estate planning specialist for Mackenzie Financial Corp. and now an independent consultant, says a common mistake is not understanding the fees you are paying. “I recommend a lot of ETFs. Many people with mutual funds still don’t understand they contain embedded fees.”

Cardy believes the single biggest risk in investing is “the inability to understand and define your own risk tolerance in the face of volatility.” Investors can fill out forms and complete risk-tolerance questionnaires but it’s only in the heat of an actual bear market that most investors discover their true risk tolerance.

At any age, the most important thing when investing is Asset Allocation, Cardy says. That’s why she believes a good financial advisor is necessary for most of us. For those who can’t find one or just don’t have the wealth to interest one, “Robo advisers are a great idea. The young should start where they can. Whether you’re 23 or 27 just start but at some point I think people should have access to good financial advice, speaking to a real person.”

Without such guidance, investors are apt to fall prey to mistakes like not being properly diversified. Older seasoned investors tend to have too high a weighting in equities, while young investors often are too cautious, being underweight stocks even though the young have the huge advantage of having very long investing time horizons.

I agree with Cardy that robo-advisers – more accurately described as online automated investment services – can prevent many of the worst investing mistakes. Because most robo services use broadly diversified ETFs as their underlying investments, you automatically avoid single-company risk, sector-risk, country risk, mistakes in asset allocation and many more ills.

You also avoid the mistake of using high-priced investments that lock you in, such as high-fee Deferred Sales Charge (DSC) mutual funds. “Robos” are especially appropriate for younger investors just starting out – many of who don’t have enough money to get a financial advisor interested in working with them.

Visit MoneySenseWeek.ca for more great money tips »
Jonathan Chevreau founded the Financial Independence Hub and can be reached at jonathan@findependencehub.com.

3 comments on “Investing mistakes you’re probably making

  1. A Regular savings account in a Bank..You are Losing money.

    Reply

    • I know a client who died with a regular bank savings account with over two million dollars in it. He lived so miserly his entire life it would be impossible for most to understand or accept it. All he did was work on his farm and nothing else.
      Obviously, as you have pointed out, he was actually losing money on the savings account so the large sum he had when he passed was due mainly to his savings and not any investment income. Can you imagine what he would have been worth with a sound investment plan!!!
      The main thing to take away from this is that it is not impossible for an ordinary person to save money. Many complain that this is juts not possible. The other thing to learn from this client is that one should enjoy their wealth and live life while alive rather than just dying with a large amount of net wealth. I should add that this fellow was never married, had no offspring, and all his siblings were deceased.
      CD

      Reply

  2. With regard to investors who sell when values drop and then buy back into the market when values rise, I have an interesting story to relate as an accountant. A client couple are terrible at investing in anything but guaranteed investments. I have told them that after tax and considering inflation they are actually losing money. They ventured into the investing world with a very small amount of funds invested in some mutual funds. That was just before the 2008 crash and I listened to their complaining for a few years until the values started to rise. As soon as they could break even they immediately sold and put that money in a GIC. Their net worth is quite high, but they have no advisor and the guy that they went to in order to place a couple grand in some mutual funds was not appropriate for them nor understood their total financial picture.
    The strange thing is that they were quite willing to purchase a rental property back in the early 80s which made them huge capital gains over the years until they sold it in 2010 due to health reasons. When questioned about how they were able to accept the risk of this investment they could not answer the question. I suggested that it likely dipped in value over the years, and wondered how they felt about that. Again they had no answer. So the thing about that investment was that they could not readily get a market value for it so it was a clear case of out of sight out of mind it seems.
    The bottom line for this couple and others is a focus on the yearly, monthly and even daily movements of an investment account. It is very difficult for many to accept the monthly statements which arrive from their investment counsel without reacting emotionally.
    CD

    Reply

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