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