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

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

Peter Mallouk

ISBN: 978-1-118-92901-8

Jul 2014

208 pages



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.

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