Top 20 Investment Mistakes People Make
Every day, people go to their online RRSP accounts and sell the fund with the worst one-year returns and buy the one with the best one-year returns. It makes them feel better, and they will tell you that the new fund is ahead of the curve and run by a smart manager and the old one has lost its touch. What they won’t say is that they are buying high and selling low. Nor will they say that short-term returns are just noise. You are better off buying funds with lagging short-term performance than those with top-quartile returns.
You bought fund A at $10 and now its net asset value is at $5. You bought fund B at $10 and now it’s at $20. Which should you hold, and which should you sell? I have no idea. The amount you paid is relevant only to tax planning. What matters is which will have better returns over your investment horizon. If the answer is fund B, then sell fund A (you’ll have a tax benefit if it’s in a taxable account) and put the proceeds in fund B. The problem is that people have an emotional attachment to the price. Some are afraid to book losses, and others are too anxious to sell a winner for fear that they’ll miss out on gains. What matters is whether the funds have strong fundamentals.
The short-term direction of the stock market is unpredictable; yet selling in reaction to market moves implies that you can predict short-term moves. The markets are not perfectly efficient from minute to minute, but they quickly reflect a best guess based on new information. Fear is one of the greatest enemies of successful investing. When you’re worried about your money, you want to make it safe. However, you risk missing out on the next rally, and you might not even keep pace with inflation. From a long-term perspective, cash is very risky and stocks are low risk. Put another way, this is another example of selling low and buying high. Savvy investors go bargain hunting when the market is oversold; you should, too.
We get mailings all the time telling us about hot new investments. In 2007, commodity funds and BRIC (Brazil, Russia, India, China) funds were the rage and the timing turned out to be terrible. These specialist funds are exciting and fun to buy, but they will mess up your portfolio if you let them. Most niche funds charge more than more-diversified funds, and they typically have third-tier managers and less analyst support. Yet you can get the same exposure to sectors and regions through more-diversified funds. Niche funds drive up your costs, add extra volatility, and make managing your portfolio more difficult.
This is a biggie. Spend a little time to spell out your goals, how you’ll meet them, and the role of each investment. This is an enormous help in figuring out how to get to your goals and how to adapt along the way. Make a plan, and your day-to-day investment decisions will become easier and less stressful.
Once you’ve got your plan, spell out why you own each investment and what would lead you to sell. For example, you could say that you own a focused equity fund as a long-term 20-year investment for its manager and its moderate costs. You’d sell if the manager left, costs were raised or asset bloat forced a change in strategy. If you have doubts about the fund in the future, you can turn to that document when you may well have forgotten what the draw was in the first place.
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