In today’s shaky economy and jittery investment markets, investors
may well find that their best moves are not discovering the next big
thing or a fantastic value, but simply avoiding serious, and costly,
Here are ten of the most common mistakes we see investors making everyday, and how to avoid making them yourself.
Stocks are what most people know the most about and where they have
most of their money. Some have only a handful of stock-filled mutual
funds or ETFs in their IRAs, pension funds, or 401(k)s. Others actively
manage their portfolios and have a basket of their own personal picks.
But time and again we hear from investors who are effectively betting
the farm on equities, with 80%, 90%, or even 100% of their investable
assets in stocks. Ignoring their age, their risk tolerance, and even
their better judgment at times, these investors take the easy bait from
their 401(k) provider and load up on a “diversified” portfolio with a
growth fund, a value fund, a few index funds, some large-caps and some
smalls, and maybe even a dividend fund to boot.
No matter how you slice it, these are all stock market investments, and
that market is not a wise place to put the entirety of your assets.
Nor a safe one. When market sentiment moves in a big way, virtually
everything flows in the same direction – a painful truth for investors
who endured the 2000 and 2008 crashes. During the century’s first
decade, in fact, even low-interest CDs outperformed the S&P 500 and
other market indices.
The investors who did the best wisely kept a good portion of their
portfolio in cash or elsewhere outside of equities. They lost far less
in the big crash of 2008 and were able to quickly snap up bargains in
the aftermath because they weren’t flat on their backs.
Most of the people who remained “all in” in 2009 were the same way in
2008, and the recent, massive market gains didn’t even get them back to
level. It was those who had the foresight to hang on to some reserve
cash who truly benefitted from the rebound. The same is true today.
Those with the free capital to invest after the next big downturn will
#9. Being “all in” on bonds.
The opposite of those who have piled all their money into equities
because it is easy or because they are chasing the phantom rally. Stock
market jitters have driven many out of the equity markets entirely and
into the perceived safety of bonds. However, bonds are anything but
safe. In fact, with interest rates at ridiculous record lows, they are
probably at peak value right now.
With the potential for deflation still on the near-term horizon, some
are even making a speculative bet that bonds are the place to be, as
they assume that rates will absolutely have to stay low in that
environment. Of course, many of these same investors thought that
housing prices would continue upward forever.
When interest rates do rise again – and they will eventually – bonds
will be crushed as prices move in the opposite direction. And it can
happen quickly. It is sheer vanity to assume that one can exit just in
time. Especially since these things tend to go in the opposite
direction precisely when gains are the highest and we’re most pleased
with our choice.
#8. Being “all in” on the U.S.
Few Americans look outside their borders for investment opportunities, and that’s very nearsighted.
The U.S. economy is on the ropes, has been for some time, and might
continue to be for some time to come. Despite trillions of dollars in
stimulus money, it has failed to be very stimulated. We’ve entered a
period of no to low growth that could last for years. Thus putting all
of your eggs in the basket marked American Recovery is a risky thing indeed.
Even if the recovery charges ahead at full steam, it is safe to say
that the American economy, given its massive size, will not be the
fastest or most nimble in the world. For years now, even during the
headiest of times, our growth has been far outpaced by other
More growth is happening in the emerging nations than anywhere else,
and world markets are more accessible than ever before. Investing in
them gives you exposure to that growth, along with a potential currency
kicker (booking bigger gains in other currencies if the dollar falls,
or letting you benefit when you convert back after selling if the
dollar rises). China, India, Brazil, Mexico, Korea, Taiwan, Argentina,
Hong Kong, and Indonesia have all outpaced the U.S. in GDP growth rates
for the past decade, and appear poised to continue to do so for some
time – if not them, then other emerging economies.
And speaking of currency, it makes no sense to hold all of your cash in
dollars. Washington’s spending spree bakes future inflation into the
cake. Which means future dollars will have considerably diminished
purchasing power. Diversifying out of the U.S., by holding currencies of
countries with more conservative fiscal policies, is a prudent thing
#7. Not owning gold.
Gold was the premier investment of the past decade, increasing in value
each and every year. Parking as much as a third of your liquid assets
in physical gold that you directly control is imperative. Gold can’t go
bankrupt. It’s been the world’s universal currency since the invention
of money. And it cannot be inflated away by creating it out of thin
Gold is money. It embodies money’s two most basic
characteristics, serving as both a medium of exchange and a store of
value. In a sense, it competes with paper and digital “monies.” As
their value declines with inflation, gold’s will rise.
While even gold may be given to price swings based on fluctuations in
investor sentiment, the overall trend is up. Gold won’t provide the
spectacular returns of a stock that suddenly catches fire. But over
time, holding it is one of the tried and true ways of preserving
#6. Ignoring politics.
No one can afford to ignore what goes on in Washington. This is true
even though the vast majority of what happens there is useless if not
downright counterproductive in terms of improving the lives of ordinary
citizens (i.e., those not well connected politically).
The federal government has insinuated itself into virtually every
corner of our lives. There are few days that don’t result in yet
another rash of rules and regulations. Businesses are forced to comply
or die. They can prosper or vanish dependent upon whether Washington
favors or restricts them. They may even be taken over and run by
government itself, with taxpayer money.
This is a dreadful situation, but trying to ignore it or fight it with
your investment dollars is not going to help your portfolio. If
legislators suddenly enact a hefty beet tax, then you can confidently
invest in beets; growers will be squeezed and the price of beets will
go up. If they instead announce vast new beet subsidies, then you want
to go short; more beets will be grown than are wanted, and the price
The same principle, unfortunately, applies to everything.
#5. Trusting the government.
This is the flip side of the previous no-no. Assuming that the people
running government economic policy know what they’re doing is lethal.
Assuming that government can fix anything that goes wrong is lethal.
Assuming that it’s just a matter of time before they figure out the
right levers to push is lethal.
Just look at what they’ve already done, and what the results are.
#4. Leveraging up.
If your investments are down, the absolute worst thing you can
do is leverage yourself in order to try to get back to even. Leverage
is the single most important reason the economy is in the mess it’s in
today. You don’t want to use that as your model. Do not throw good
money after bad.
#3. Making judgments based on anxiety.
There are two fears that drive investors to make really bad decisions.
One is the fear of missing out. Staying out of investment markets is
difficult, because that makes you no money. But there are times when
preserving capital can be at least as important as making a nice return
on it. Times of great potential volatility, like today. In those
times, keeping at least some capital poised patiently on the sidelines
can be the wisest course.
The other is the fear of doing anything at all. Investment paralysis.
Because so little is clear right now, it’s easy to get caught up in
this one and opt out of the markets entirely. Or just idly sit back,
holding what you always have, because it’s easier than figuring out
what you should really do.
Both are deadly.
But even in the worst of markets, there are opportunities. For
instance, technology progresses, recession or no recession. Companies
bringing out breakthrough products are doing just fine. Other companies
that steadily post strong earnings can get beaten down to where
they’re real bargains.
The trick is to be selective, find great companies, and buy them cheap.
Let market dips driven by other people’s anxieties bring the price
down to a level where it would be difficult to lose money, then pounce.
Making investment choices simply out of fear is a really poor idea. But
at the same time, you don’t want to go to the other extreme, becoming
overconfident. Know that you cannot discover some magical formula for
beating the market. There isn’t one. Be always wary. Be skeptical.
Continually review your decisions to see if the basis on which they
were made remains sound.
Invest without emotion.
#2. Buying with the herd.
If you hear about it on CNBC, the money’s already been made. And that’s all you need to know about that.
#1. Assuming the worst is behind us.
This is no ordinary recession. Never before have we seen a downturn
that has affected virtually the entire world at once. Nor a world where
so many governments have assumed such massive debt loads, leveraging
their currencies in a desperate attempt to defibrillate their economic
But it’s not working. Overspent governments from New York and Greece to
California and Spain are collapsing under their debts. Millions of
unemployed Americans have all but given up searching for jobs. And the
U.S. government is looking down the barrel of trillions of borrowed
dollars it has no hope of ever repaying.
Unlike a normal dip in the business cycle, this is a massive
liquidation of malinvestment that resulted from decades of living
beyond our means, piling debt upon more debt. Those imbalances must be
wrung out of the system, and they will be. The financial market demands
Assuming that this is an ordinary recession, and that if you're patient
your investments will just “come back,” is the worst sin an investor
can commit today.
Make no mistake about it, the whole coming decade will be a hard, bumpy
ride. So take the steps today to prepare yourself and your portfolio
for what’s to come.
If you closely review the above-mentioned points, there’s only one
possible conclusion: You need to get at least some of your money out of
the United States. And that is not “Whenever you get around to it”
advice anymore – the window of opportunity is closing for those who
want to protect their assets from the long and ever-growing arm of the
government. Learn all about the 5 best (and perfectly legal) ways to internationalize your wealth
– details here