Scary Investment Mistakes

We are all guilty of making mistakes; here are some of the most common ones people make when it comes to investing:

Falling in love with the product.  If you fall in love with the product (or company story) you may not see its fundamental flaws, poor market conditions or the overpricing of the stock.   Marketers do a great job of telling stories; that is what gets you emotionally attached to the product.  Make sure you take a look at the numbers and plain facts; they might be telling a different story.

Believing this time things will be different.  Believing that you have found something new or different to invest in can get you into a lot of trouble in the investment world.  Simply put, it is never different.  No matter what decade we are in; the principles of investing never change, so stick to the tried and true. 

Confusing good products with good investments.  Sometimes people will use a product or service and they fall in love with it, they believe it’s the next big investment opportunity.  But remember, even popularity or wide spread usage of a product does not always translate into profitability to share holders.  How many people held onto their BlackBerry stock too long because they loved the product, totally missing the fact RIM was a shrinking minority?  This can work in the reverse too; never shy away from a stock because you don’t like the product or company.  Don’t like Wal-Mart?  Too bad, the stock is up 50% over the last three years.

Reaching for higher interest rates on bonds.  Choosing bonds with a higher coupon rate to pick up a couple of extra points of yield may be riskier than you think.  In this environment a yield over 7% tends to be a warning sign.  A bond with a higher yield inherently carries higher risk and your couple of extra points may be wiped out quite quickly with a capital loss.

Focusing too much on the short-term.  It is easy to get caught up in the bad news-of-the-day and focus too much on the short term.  There are times in the market when great stocks get beaten down due to market events, but you have to remember to be patient and keep the focus on what your goals are.

Holding onto winners too long.  Holding onto winning stocks can be just as costly as hanging onto losers, remember Nortel?  The best way to avoid losing huge gains is to strategically sell small amounts of the investment as the price rises.  This strategy may go against your emotions at the time but by selling a portion of the winnings at certain levels you can help avoid a huge loss down the road.

All of the mistakes above are derived from the same thing; emotions.  Remember, following strategies is investing; following your emotions is gambling.  If you have any questions or want to talk about your investment portfolio don’t hesitate to give me a call.

Happy Halloween,

Tracey

Source:  Advisor.ca posted 09-11-14 original article by Al and Mark Rosen.