common mistakes investor make

[isralexba]

Hi,

I thought for a while on the mistakes that ar common to most of the invstors i have met...

1. looking at the stock market as a casino - going for the jackpot and risking it all
2. trying to time the market
3. buying assests without understanding the idea behind them (stock options, structured products etc)
4. investing all of the funds in a single asset (1 mutual fund, gold or whatever)
5. not paying attention to management fees (which eat A LOT from one's revenues)

What do you think? any other common mistakes you have seen?

Alex

[jefffou]

Little or no attention to the correlation of assets within one's portfolio.

Most investors believe that to own many asset classes decrease risk. This is simply not true. For years the morningstar style boxes have presented a theory to investors. This theory goes something like this.....

".....Buy stock funds in large-cap, small-cap, and midcap. Also throw in value, blend, and growth and place varying amounts within each of the nine combinations. Slightly tilt the portfolio toward one's risk tolerance and voila...."

These "diced-up" slices of equity create an illusion of proper asset allocation. However, the opposite is really true. Each of nine "style-boxes" are VERY closely correlated with each other, in particular when it matters (see October 2008 thru March 2009.)

REAL asset allocation considers the correlation of each asset class with each of the other asset classes within the portfolio in ALL types of economic phenomena. REAL asset allocation addresses portfolio risk by combining asset classes that do NOT correlate so highly with one another.

An example from the stock market may help. If I own Citi stock, does it do me much good to own Bank of America (ignoring, of course, the risk of individual company risk which does not really exist with funds.) Wouldn't it be better to own a stock that generally prospers when Citi generally doesn't? The morningstar style boxes have effectively presented the same flaw. And that is, that some sort of diversification has been achieved. Actually the word that comes to mind is duplication, not diversification.

I will now step down from my soap-box.

Jeff

[jIM_Ohio]

Using the word risk as to imply there is only one type of risk, or only 1 way to manage risk.

so many types of risks, and so many ways to account for it in any number of portfolios

[wincrasher]

Last March I had about a $100k on hand. It was either invest or take advantage of a great deal on a house.

I really was looking hard at buying Ford stock. But at the time thought they were going under like GM. All stocks were shaky as we thought the world was ending.

I bought the house and now have a mortgage balance of $270k. Had I bought the stock, I'd have over $1 million in cash.

[Eric Schmidt]

Last March I had about a $100k on hand. It was either invest or take advantage of a great deal on a house.

I really was looking hard at buying Ford stock. But at the time thought they were going under like GM. All stocks were shaky as we thought the world was ending.

I bought the house and now have a mortgage balance of $270k. Had I bought the stock, I'd have over $1 million in cash.

The unpredictability of the stock market is still a great concern of mine. I think housing will eventually turn for the better

[heidrek]

Housing is definitely a longer term investment. I persoanlly think that we're in for a slow and gradual housing recovery when it comes so don't expect big jumps. Then again I'm mildly terrified of what can happen with the stock market as well.

Has anyone had experiencw with Forex trading?

[jpg7n16]

6. Buying a stock because it just reached it's all time high.
7. Selling a stock because it just reached it's all time low.

[JBinKC]

I think Jim Rogers summed it up best: "The problem with most investors is they always feel compelled to immediately replace a winner with a new investment".

That sure makes sense to me in this bubble economy.

[grand_canyon]

Last March I had about a $100k on hand. It was either invest or take advantage of a great deal on a house.

I really was looking hard at buying Ford stock. But at the time thought they were going under like GM. All stocks were shaky as we thought the world was ending.

I bought the house and now have a mortgage balance of $270k. Had I bought the stock, I'd have over $1 million in cash.

You never know. You could've gotten into Ford stock and it went belly up.

Has anyone had experiencw with Forex trading?

I have played around with Forex. Talking about a casino feel. Yikes. Never did real well at it. I met someone who's working with someone who makes 300K a year in forex so it's doable.

[cyclone1]

Diversify, diversify, diversify. I think this can't be stressed enough

[bjl584]

Not admitting when you were wrong and refusing to sell a stock that is a loser.