Few things are more maddening than making costly mistakes that could easily have been avoided. In an effort to avoid some of these traps when it comes to your money, we asked best-selling author, columnist and financial guru Larry Swedroe to list 5 common investment mistakes for the latest installation of our series "Investing 101."
1) "Recency" - Buying what has recently been up, selling what has fallen down
This self-made word of Swedroe's may be new to you but the concept it addresses is probably more familiar under the terms, ''bad timing'' or " buying high and selling low." As Swedroe puts it, it's like "driving forward but watching the rear-view mirror." Needless to say, chasing yesterday's winners, then panic-selling when they go down is the surest way to achieve terrible performance.
2) Over Confidence
Whether you have too much confidence in your investment skills, your stocks, fund or manager picks, or in your ability to time the market, Swedroe says this mistake can prove to be very costly. Telltale signs and risks of over-confidence include trading too much and failing to properly diversify because you believe your own ideas will work so well. "The more you trade the worse you do."
3) Believing That Great Companies Make Great Stocks
Swedroe says, contrary to conventional wisdom, this mistake is one of the most common. Even though growth companies earn a lot more, he says "markets price for risk." What that means is the premium you must pay to own these so-called leaders, has effectively already priced-in the higher growth rate, which ironically, leads to lower expected returns.
4) Failing To Differentiate Between Information And Wisdom
Another area that trips up investors is not knowing the difference between information and something you can actually use to make money. We often hear how a particular event or outcome is ''priced-in'' to a stock or the market, but as Swedroe sees it, unless you know something that nobody else knows (which is unlikely), "information is not value relevant." Much the same way that a point spread neutralizes the betting between a good and a bad football team, differing PE ratios neutralize the expectation between different stocks.
5) Listening to Experts Who Give Forecasts
When it comes to predicting the future Swedroe says "there are no good forecasters," be it about the weather, politics, the economy, geo-political events and all sorts of other common areas of interest. Research shows little if any advantage can be gained by following the changing public proclamations of outspoken and often over-confident pundits.
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