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The 5 Mistakes Every Investor Makes and How to Avoid Them: Getting Investing Right

ISBN: 978-1-118-92900-1
208 pages
July 2014
The 5 Mistakes Every Investor Makes and How to Avoid Them: Getting Investing Right (1118929004) cover image


Identify mistakes standing in the way of investment success

With so much at stake in investing and wealth management, investors cannot afford to keep repeating actions that could have serious negative consequences for their financial goals. The Five Mistakes Every Investor Makes and How to Avoid Them focuses on what investors do wrong so often so they can set themselves on the right path to success. In this comprehensive reference, readers learn to navigate the ever-changing variables and market dilemmas that often make investing a risky and daunting endeavor. Well-known and respected author Peter Mallouk shares useful investment techniques, discusses the importance of disciplined investment management, and pinpoints common, avoidable mistakes made by professional and everyday investors alike.

Designed to provide a workable, sensible framework for investors, The Five Mistakes Every Investor Makes and How to Avoid Them encourages investors to refrain from certain negative actions, such as fighting the market, misunderstanding performance, and letting one's biases and emotions get in the way of investing success.

  • Details the major mistakes made by professional and everyday investors
  • Highlights the strategies and mindset necessary for navigating ever-changing variables and market dilemmas
  • Includes useful investment techniques and discusses the importance of discipline in investment management

A reliable resource for investors who want to make more informed choices, this book steers readers away from past investment errors and guides them in the right direction.

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Table of Contents

Preface xi

Acknowledgments xiii

About the Author xv

Introduction The Market Wants to Be Your Friend xvii

Mistake #1 Market Timing 1

The Idiots 5

The Liars 5

Why Is It So Hard to Beat the Market? 7

The Masses Get It Wrong, Over and Over Again 8

The Media Get It Wrong, Over and Over Again 9

Economists Get It Wrong, Over and Over Again 9

Investment Managers Get It Wrong, Over and Over Again 14

Newsletters Get It Wrong, Over and Over Again 17

Your Buddy 18

Strategies That Don’t Sound Like Market Timing but Are Market Timing—Oh, and They Don’t Work, Either 19

What Smart Investors Have to Say on Market Timing 21

Knowing All This, Why Would Anyone Market Time? 21

Corrections 22

Bear Markets: An Overview 26

When Bear Markets “Turn,” They Make People on the Sidelines Look Silly 30

The Market Is Volatile—Get Used to It 30

You Can’t Wait for Consumers to Feel Good 31

Learning to Accept the Bear Markets 33

Miscalculating the Risk of Market Timing 34

But What If I Am Perfect? 35

Lump Sum Investing versus Dollar Cost Averaging 36

Learning to Fly 40

Avoiding Mistake #1—Market Timing 42

Mistake #2 Active Trading 43

The History of Active Trading 44

Active Investment Managers Lose to Indexing 45

Fisher Investments 46

Legg Mason Value 46

Jim Cramer 48

Newsletters Lose to Indexing 50

Active Mutual Funds Lose to Indexing 50

Survivor Bias (a.k.a. Mutual Funds Perform Even Worse Than the Data Suggests) 52

What About the Winners, Huh? What About the Winners?! 53

Hedge Funds Lose to Indexing 56

Endowments—Misperception of Performance 60

Venture Capital (Sounds Sexy but Usually a Dog) 62

The Taxman Commeth (a.k.a. Dear Goodness, It Gets Worse) 64

Portfolio Activity Hurts Performance 64

But Doesn’t Active Management Work in a Down Market? 65

Why Indexes Win 65

S&P 500, Here I Come! 67

Avoiding Mistake #2—Active Trading 69

Mistake #3 Misunderstanding Performance and Financial Information 71

Misunderstanding #1—Judging Performance in a Vacuum 71

Misunderstanding #2—Believing the Financial Media Exists to Help You Make Smart Decisions
(a.k.a. the Media Is Killing You) 73

Misunderstanding #3—Believing the Market Cares about Today 77

Misunderstanding #4—Believing an All-Time High Means the Market Is Due for a Pullback 80

Misunderstanding #5—Believing Correlation Equals Causation 83

October Is the Worst Month to Invest 84

Sell in May and Go Away 85

Misunderstanding #6—Believing Financial News Is Actionable 86

Misunderstanding #7—Believing Republicans Are Better for the Market Than Democrats 87

Misunderstanding #8—Overestimating the Impact of a Manager 89

Misunderstanding #9—Believing Market Drops Are the Time to Get Defensive 90

Avoiding Mistake #3—Misunderstanding Performance and Financial Information 91

Mistake #4 Letting Yourself Get in the Way 93

Fear, Greed, and Herding 93

The Overconfidence Effect 97

Confirmation Bias 101

Anchoring 103

Loss Aversion 105

Mental Accounting 106

Recency Bias 108

Negativity Bias 111

The Gambler 113

Avoiding Mistake #4—Letting Yourself Get in the Way 114

Mistake #5 Working with the Wrong Advisor 117

Most Advisors Will Do Far More Harm Than Good 118

Advisor Selection Issue #1—Custody 118

Advisor Selection Issue #2—Conflict 123

Advisor Selection Issue #3—Competence 129

A Final Thought on Advisors—Principles 132

Avoiding Mistake #5—Choosing the Wrong Advisor 132

Mistake #6 Getting It Right 135

Rule #1: Have a Clearly Defined Plan 135

Rule #2—Avoid Asset Classes That Diminish Results 137

Rule #3—Use Stocks and Bonds as the Core

Building Blocks of Your Intelligently Constructed Portfolio 141

Putting It All Together 144

Rule #4—Take a Global Approach 145

Rule #5—Use Primarily Index-Based Positions 147

Rule #6—Don’t Blow Out Your Existing Holdings 147

Rule #7—Asset Location Matters 149

Rule #8—Be Sure You Can Live with Your Allocation 150

Rule #9—Rebalance 151

Rule #10—Revisit the Plan 152

The Ultimate Rule—Don’t Mess It Up! 153

Portfolio Examples 154

A Path to Success—Intelligent Portfolio Construction 158

The Ultimate Mistake 161

Conclusion Let’s Roll! 165

References 167

Index 175

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Author Information

PETER MALLOUK, JD, MBA, CFP, is the President and Chief Investment Officer of Creative Planning and affiliated companies. Mallouk’s companies provide comprehensive wealth management services to its clients, including investment management, financial planning, charitable planning, retirement plan consulting, tax, and estate planning services. He has been named the #1 independent financial advisor in America on Barron’s list and his company has been named the #1 independent wealth management firm in America by CNBC.

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Press Release

August 04, 2014
The 5 Mistakes Every Investor Makes And How to Avoid Them

Don’t let market timing, active trading, acting on bad information, making behavioral mistakes, or hiring the wrong advisor lead you down a path that could permanently damage your financial wellbeing.

In The 5 Mistakes Every Investor Makes and How to Avoid Them (Wiley, August 2014) wealth management expert, Peter Mallouk, JD, MBA, CFP reveals the common and critical mistakes that investors make, why they make them and how to avoid to them. After understanding these land minds and pitfalls he provides a sensible framework for creating a winning investment portfolio.

The 5 Mistakes Every Investor Makes offers investors an accessible guide that can dramatically improve investment performance, reduce stress, substantially increase the probability of achieving investment goals, and even improve quality of life.

The missteps highlighted are:

  • Market Timing: There are thousands of investment managers who claim to be able to market time – some famous, some not – but they have one thing in common, none of them can do this effectively or repeatedly. The research shows that pros can’t do it. The odds are pretty high that you, your buddy, or your advisor can’t do it either.
  • Active Trading: Active traders routinely underperform the market. The idea that smart people can trade stocks actively to improve performance is unfounded. Fees, taxes, and underperformance are guaranteed and expensive.
  • Misunderstanding Performance and Financial Information: A large part of financial information that investors encounter is damaging or disingenuous. For investors to protect themselves from taking action based on it they must fully understand how reference sets work, how performance data can be misleading, view financial news with skepticism, and develop a skill for filtering out the noise.
  • Letting Yourself Get in the Way: Ultimately it is our own behavior that does us in. The key to dodging the pitfall is to be aware of what your instincts are telling you and recognize behavioral land minds such as: recency bias, negativity bias, mental accounting, loss aversion, anchoring, confirmation bias, overconfidence, and succumbing to fear, greed and herding.
  • Working with the Wrong Advisor: If an advisor is the right choice for you, make the decision carefully. Understand the importance of custody and competence, and most importantly make sure your advisor has no conflict and follows the philosophy that makes the most sense for you.
  • The Ultimate Mistake: It’s your money! You busted your butt for it, you saved it, and you preserved it. So long as you are not jeopardizing your financial security, enjoy yourself a bit, give away what you want to, and overall loosen up a bit and experience the fruits of your labor.

The 5 Mistakes Every Investor Makes also reveals the ten rules for getting investing right. To demonstrate how to apply the ten investing rules, Mallouk provides illustrations of exemplary investment portfolios that address various types of investment goals. Step-by-step, he reveals what it takes to construct an intelligent portfolio and includes information on how to use stocks and bonds as the core building blocks.

The 5 Mistakes Every Investor Makes and How to Avoid Themgives investors a reliable resource for making the type of informed choices that will lead to a lifetime of investing success.

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