Top Ten Stupid Investor TricksCategory: Finance
Article added by: Cathy Pareto
My mom always taught me, "Cathy, if you don’t have anything good to say then don’t say
anything at all”. Sorry mom, but this time I’m not holding back! Working out at the gym the other night, I had the misfortune of being subjected to a popular investment show on a leading cable financial channel. The channel: habitual financial pornography purveyor CNBC. The investment circus, uh…I mean investment "show” was called…well better we leave the name out for the sake of avoiding a lawsuit. Let’s just say the show’s name was synonymous with "Crazy
Currency”.
After twenty minutes on the elliptical machine and twenty minutes too much of watching this
bumbling idiot scream his way through ridiculous "investment recommendations”, it dawned on me how much utter nonsense investors are exposed to on a daily basis in the media.
Everything that spewed out of this guys mouth ("buy this”, "sell that”, "get out now”, "hold this for another XXX days”) is exactly the wrong message to send investors. Far too many
unsuspecting investors believe this junk and subsequently jeopardize their financial futures by following these misguided "advisors” in the media. It has become my personal mission to shed light on this nonsense and hopefully help investors avoid some deadly mistakes.
So, I thought a "Lettermanesque” Top Ten List of stupid investor tricks was in order to shed
some light on what NOT to do with your money.
10. Chase yesterday’s returns
Truth: Attempting to chase yesterday's returns is an easy way to consistently lose. Maintaining a long-term strategy and sticking to it will vastly improve the ability to grow your account. Investors are misguided in thinking that past performance is somehow an indication of future potential.
9. Ignore portfolio risk
Truth: Portfolio volatility negatively impacts terminal wealth. Investors should be equally
concerned about investment performance and risk control and strive for the highest return
available per unit of risk.
8. Investment policies are unnecessary
Truth: Investing without a clearly defined plan is like embarking on a cross country road trip
without a map. An investment policy helps identify the appropriate universe and mix of assets to hold in a portfolio, given your specific level of risk tolerance and time horizon. Policies should be reviewed at least once a year and portfolios rebalanced at least once a year.
7. Avoid foreign investments
Truth: International investments need not be scary. The key reason investors flock to foreign stocks is not for higher returns, but for diversification. Modern Portfolio Theory proves that by adding international assets to a mix of U.S. stocks, investors reduce portfolio risk while enhancing risk adjusted returns.
6. Pick individual stocks
Truth: The fact is, there is an overwhelming amount of evidence that shows that there is little
advantage in attempting to either time markets, or select individual equities. Such efforts
instead, result in additional cost, additional risk, and lower returns over time. In addition, there is no evidence to suggest that past superior performance of a stock, fund or manager has any value in predicting the future performance of the stock, fund or manager. See #10 above.
5. Time the stock market
Refer to #6. Truth: Market timing is ineffective, expensive, tax inefficient and unnecessary.
What drives investment returns is your asset allocation decision, not stock picking or market
timing.
4. Trade incessantly
Truth: Incessant trading by trigger happy investors increases portfolio costs and taxes.
Investors are far better suited to outline a sensible, strategic investment plan and stick to it.
Limit rebalancing to twice a year or specific variance measures.
3. Buy high cost, actively managed mutual funds
Truth: Successful portfolios are based on research and reasonable expectations, not intuition. illogical investors attempt to guess which manager, stock or asset class will have tomorrow's best performance. That's why so many have consistently failed. Successful, rational investors excel because of a clear methodology and, of course, discipline. High cost, tax insensitive funds are a drag on performance and ultimately terminal wealth. Avoid them!
2. Concentrate your investments
Truth: Holding large concentrations of any one investment or asset class (including company
stock) will dramatically increase your portfolio risk, minimizing your chances of success. Avoid investment overlap and don't buy two mutual funds that have similar characteristics.
1. Get hooked on CNBC or any other market commentary show
Truth: Television provides entertainment, not advice. The suggestions or tips made on popular financial cable shows have no direct correlation to investment success. Instead, the ones making money are the cable networks and the shows’ hosts who get to bag big bucks in
advertising, employment contracts or proprietary investment software/newsletters. The tips
offered on these shows are completely disconnected from the sensible and proven financial
theories that academics and credible money manager have adopted long ago. Investors are far better served to adhere to a fundamental strategy and simply tune out the garbage on T.V.
Posted By: Cathy Pareto
Web: http://www.cathypareto.com
Contact: e-mail
| About the Author: |
| Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. Money management does not have to be an intimidating and mystifying process. Cathy's belief is that there is more
to investment management and financial planning than just the numbers. It takes commitment, clear communication and trust between the Advisor and the Client to plan out a strategy, and it requires the experience of a competent Advisor to execute that strategy.
For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally,
she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.
Educational Background
Cathy earned her BA in Finance and later her Executive MBA at Florida International University, graduating in the top 20% of her class and as a result she was inducted into the prestigious Beta Gamma Sigma Graduate Business Honors Society.
In the Media
Cathy Pareto’s articles have been published in periodicals and websites, including Women in Business,Investopedia.com, Miami Medicine, Florida Medical Business, AccountantsWorld.com, My Financial Advisor, Indexfunds.com, and Fundsinteracctive.com. Her media contributions include quotes in BusinessWeek, The Wall Street Journal, The Sun Sentinel, CNNfn, Latina Magazine, Hispanic Trends, AARP's
Segunda Edad, and many other financial publications. She has appeared on television and radio shows including CNBC’s “Power Lunch”, WLRN/NPR’s “Topical Currents", “Wealth & Wisdom”, Total Picture Radio, Landed Radio and more.
www.cathpareto.com
Professional Memberships
Greater Miami Estate Planning Council - Current Member of the Board of
Directors
United Way of Miami Dade Young Leaders - Current Member
NAPFA National Association of Personal Financial Advisors - Current South
East Region Board Member
Florida International University Executive MBA - Current Member of
Professional Advisory Board
Financial Planning Association - Current Member |
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