The 6 Worst Investing Mistakes and How to Avoid ThemSubmitted by Justin Hayek on July 20th, 2017
Investors make a number of mistakes which lead to losses, heartache and steering them off the path to their financial goals. Here are the six worst investing mistakes and how to avoid them:
Not Having Clear Investment Goals and Objectives
As an investor, you start off with the idea, you want to make money or generate income from your investments. Unfortunately from there you get lost as you have not developed a plan. Your portfolio becomes a mish-mash of stocks you heard about on BNN and hot-stock tips you received from your brother-in-law. The result is your portfolio does not perform the way you had hoped and an outcome you wanted to avoid.
In our portfolio management service we address this problem in the first step: the discovery process. The goal in the discovery process is to fully understand your investment objectives, goals and risk tolerance. From there a solution, called an investment policy statement (IPS), is tailored to your unique situation and needs. We strictly adhere to your IPS in our recommended investments so that you achieve your desired investment outcome, allowing you to be well on your way towards your investment goals and objectives. Whether that's to increase your investment returns or generate more income from your investments.
Letting Emotions Get in the Way
You invest in a mutual fund recommended by the nice lady at the bank who describes it as the top performing fund last year (greed). You watch the value of your investment grow as the fund continues its stellar performance. You begin to think it will continue going higher, so you decide to invest more (greedier). The fund has a bad quarter, and another bad quarter and another until you are now down on your original investment. Things get worse for you as the once high flying fund now becomes the worst performing fund recently. You bail out (fear) hoping to just salvage some of your original investment, your loss is substantial. You decide to check the quotes to see how its done since you sold. Its up. You buy back in, determined to make your money back on this investment (anger & greed). Again, failure, it goes down.
Investing should not be an emotional roller coaster ride. The key is to remove your emotions from the equation. Think about it, have you ever made a good decision when you were in an emotional state? By developing an investment plan and strategy in advance, you can objectively go about achieving your goals. With our rules based portfolio management service this is exactly what we do. Our investment strategy adheres to a strict set of investing rules, giving you the advantage of removing emotional investing out of the equation. This is turn will help you generate greater investment returns.
Buying High, Selling Low
This may be the most common mistake and challenging to overcome. You buy a stock. The chart indicates its share price should be going higher. The stock stalls and it goes sideways and then lower. You watch intently hoping it will turn the right way and to sell just to break even. As you watch it drift lower, and lower the stock reaches an all time low. You've lost your shirt on this investment, you throw in the towel and decide to sell before it goes to $0.
With our portfolio management service, you can avoid making this mistake by buying when certain investments become cheap relative to others and sell when positions become relatively expensive to others. Your portfolio is strategically positioned in investments that may move inverse to one another, allowing you to benefit from the rise of one (selling) and the decline of the other (buying). A good analogy would be a teeter-totter. As one end of the teeter totter moves up, the other end moves down. You sell on the way up, buy on the way down. You can increase your investment returns while reducing your downside with this strategy we employ.
Failing To Diversify Enough
You've heard the expression "don't put all your eggs in one basket". This expression is certainly applicable to investing. As the story goes, you have a "good feeling" about an investment and decide to go all in. If it works out, you're set for life...sipping champagne on your yacht in the Bahamas. But unfortunately, it doesn't. Catastrophe. This is avoidable.
The best way to achieve diversification is by investing using ETFs. What is an ETF? Essentially its like a mutual fund but better. Through one ETF you can gain exposure to hundreds of different quality companies. The advantage offered by ETFs is they provide your portfolio immediate diversification so that you are no longer putting all your eggs in one basket, reducing your downside risk.
Paying Too Much in Fees and Commissions
When was the last time an advisor suggested you are paying too much in fees and commissions?? If you own mutual funds, you may be paying way too much in fees. How much are you paying? According to Morningstar, a leading provider on investment research, Canadians are paying an average of 2.35% per year in fees on their equity mutual funds. That is, if the mutual fund generated 2.35% gross return on the year, you as an investor saw 0% net return. To make matters worse, many of these fees are hidden too, in the form of trailer fees paid to the advisor. This is costing you money and dragging down your investment returns.
We are big proponents of being upfront with fees since you need to know the value of our service. An additional benefit to our portfolio management service is you can deduct our management fee against your annual income. Effectively reducing your cost by up to 40% (depending on your tax bracket), saving you money and increasing your investment returns.
With what are historically low interest rates and yields, many investors have been out chasing after yield: the promise of a higher dividend yield or interest rate. But this may lead to problems. Back in July 2015, Crescent Point Energy (a Canadian oil & gas company) was trading at ~$23 and paid a monthly dividend of $0.23 per share (and had for several years) for a remarkable dividend yield of 12%. Investors bought up the stock, excited by the prospect they could earn 12% per year. The thinking was something along the lines of "even if the stock goes no where, I'll make 12% per year". Guess where this is going. The next month, Crescent Point slashed its dividend by 57% down to $0.10 per share! The stock cratered to a multi-year low of $11.31 - after a 50% loss on the investment, a 12% dividend isn't looking so appealing.
You may want to generate income from your investments, whether it's to increase your investment returns or to provide monthly cash flow for living expenses. The best way for you to do this is by finding investments that can boost your yield while providing diversification and reducing risk. The way we do this is by using a preferred shares ETF in our portfolio management model. We've covered some of the features and benefits to this asset class here. Preferred shares feature a higher dividend yield than most stocks (without taking on unnecessary risk like the Crescent Point story) and provide diversification to your portfolio. This will allow you to generate more income from your investments and reduce downside risk.
Investing doesn't have to be so difficult. If you can avoid the biggest investing mistakes investors make, you can be well on your way to achieving your financial goals. Ask us how we can help.
Information contained herein represent the views of the writer, and not those of PI Financial Corp. or PI Financial (US) Corp. (collectively “PI Financial”), based on assumptions which the writer believes to be reasonable. The material contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. While the information herein cannot be guaranteed, it was obtained from sources the writer believes to be reliable, but in providing it neither the writer nor PI Financial assume any liability. This information is given as of the date appearing on this report, and the writer and PI Financial assume no obligation to update the information or advise on further developments relating to securities, products or services. This report is intended for distribution in those jurisdictions where PI Financial is registered as an advisor or a dealer in securities. Any distribution or dissemination of this report in any other jurisdiction is strictly prohibited.