Investment Mistakes to Avoid in 2017
Every year there are studies coming out that discuss why investors underperform the markets. Dalbar QAIB, Morningstar, BlackRock and others all presenting data that show the average investor buys high and sells low. I will distill some of the investment mistakes and more common errors I have seen.
Complex Investment Strategies
The biggest investment mistake I often see is when there is a disconnect between the investment manager’s strategy and the investor’s understanding of how that strategy should perform in different market environments. Problems can arise when “the market” is up and a complex strategy is not. This may be due to legitimate management issues but many times it can be due to a strategy being out of favor and in which the manager is still providing good value.
Strategies like markets can be cyclical going through periods of highs and lows. Investors are often drawn to complicated strategies based on past performance and purchase them towards the height of a cycle. Another investment mistake that can come with some complex strategies is that they are often not grounded in the reality of being a part owner in a real business, sector, or asset class. When their strategy is out of favor at the same time “the market” is up an unknowledgeable person may make the classic investment mistake of “selling low” for the wrong reasons.
A more sensible core investment strategy for most investors may be one that is easy to understand, is simple to implement, and more correlated to “the market”. With a sensible core, the investor can use these other strategies on the margins for diversification purposes while having their personal results more aligned with what they are hearing and reading day to day.
Market Driven Objectives
Generally speaking, my experience has been that successful investing is goals based and plan driven. Most of the investment mistakes I have observed are when the targets are market based and performance driven.
Most people are investing for long term needs such as retirement income and legacy plans. Current news in the world, the economy and the markets are more often a distraction from these longer term goals. Case in point, Wells Fargo (WFC) which yields just under 3%. They announced their cross selling issues back in August of 2016 and promptly dropped over 13% by mid October. A market driven investor would have had a hard time making a case for holding the position and likely sold out. The goals based investor would have additional criteria such as yield and other qualities that could have kept them invested and ultimately rewarded for their patience.
Back in December of 2013 I wrote a piece in the Herald on Nick Saban and the Power of Process. In it I quoted him as saying, “The more one emphasizes winning, the less he or she I able to concentrate on what actually causes success.” The same is possibly true in investment management. The more we focus on performance rather than process, the more reactionary we become to economic and market “news” which often leads to buying high and selling low.
Sticking to the past
Life is full of transition points each of which comes with investment challenges. Whether you are a new parent or in retirement, there are time tested specific strategies that are tailored to your situation. There is no one size fits all approach to investing and investors should be open to adapting strategies to fit their new objectives.
A good example of this is someone who is investing for future needs such as retirement versus someone who is investing for current needs like a retiree. There are many ways of building a nest egg – most of which will work. Many of those strategies don’t work so well once you start living off of your nest egg. Dollar cost averaging, for example, can help better employ dollars into an investment program. When market returns are down you benefit by buying more shares for the same dollars. That same method in reverse for distributions means you draw down more of your resources in a down market. A lot of investment mistakes can be avoided by adopting a standard of care that applies to your situation in life.
A wise friend of mine said never buy anything from someone who has a lot of charisma. His point was that they often rely on their skills of confidence over competence. I would reverse it to say only buy services from those with empathy and good bedside manner. When markets get chaotic, clients need to feel heard and understood. A caring advisor can act as an emotional circuit breaker that allows the client to reassess their situation in a more objective manner.
Vanguard Investments published a paper on the value of advice called Advisor’s Alpha. In it they focus heavily on empathy or what they call behavioral coaching. As appropriate a good empathetic advisor can act as a sounding board to help avoid investment mistakes and to address the 4 issues discussed above.
The opinions expressed in this material are for general purposes only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Gardner Sherrill, CFP, MBA is an independent wealth manager with Shoreline Financial Partners. To learn more visit www.shorelinefinancialpartners.com.
Securities and advisory services offered through LPL Financial, A Registered Investment Advisor, Member FINRA / SIPC a registered investment advisor.