Common Mistakes

There are a variety of mistakes that investors make in managing their assets, and most of them are related to behavior.

1.Greed: In 1998 and 1999, when getting a 30% return on a mutual fund was ho-hum, everyone was racing to the technology stock with the highest return, 80% to 100%. No one wanted to miss out, and the usually conservative reasonable investor was in the middle of it all. “I don’t want those stinkin’ bonds; they are yielding only 7%” was the common mantra. Give me technology and NOW!

2.Fear: The opposite of greed has equally damaging psychological problems. “Get me out now! I can’t take any more losses. Let’s sit it out until the market has bottomed out, and then I’ll go back in.” As if anyone would know when the bottom had arrived. The emotions are real, but acting on them generally is inappropriate.

3.Overdiversification: If one is good, then 20 is better. Many portfolios are made of the number-one-performing fund of the previous year. Eventually, you have a variety of funds or stocks that all look the same.

4.Underdiversification: This goes hand in hand with greed: betting the farm on one or two stocks, looking for the grand slam. It is a roll of the dice at best, and the risks are high. Many, many people have gotten caught in this emotion in their company stock—Enron and Worldcom to name a few. I still see many people with the majority of their 401(k) in their company stock but who consider themselves moderate to conservative investors. They think those bad things will not happen to them.

5.Borrowing: Using someone else’s money to leverage your position can be a smart investment move. We do it all the time when buying a home. But taking on this additional risk in the equity market is a recipe for disaster, especially as you near retirement.

As Warren Buffett’s teacher Benjamin Grahman said in his book The Intelligent Investor, “The investor’s chief problem—and even his worst enemy—is likely to be himself.”

We typically steer clear of other investments such as options, futures, or higher-risk ventures in retirement plans. Often, such investments require specific expertise in the area and greater monitoring. Therefore, the need for income and growth from a retirement plan is generally served best by the above-mentioned retirement vehicles.