Getting Started – Common Investing Mistakes

This post explores the common mistakes faced by traders and investors. I am putting together a series of posts in the Getting Started series to help new investors, but this post holds true for seasoned investors as well – as we tend to forget some of the basics and get caught in the moment. It is always important to keep track of the following points while investing in order to avoid repeating these mistakes.
1. Lack of understanding: Jumping into an investment without understanding it is one of the most common mistake. Every profession goes through years of training and practice, yet people gamble their life savings away by jumping into the stock market without educating themselves. Trading the hot stocks that you hear about without understanding  anything about the business is guaranteed to lose you money. Another problem adding fuel to the fire here is that the media and “experts” pass on their opinion portraying it as factual information.
2. Timing the market: Timing and beating the market consistently is probabilistically unlikely. Day trading and high-frequency trading simply does not work for the individual investor because the odds of beating the institutions are minimal, if not zero. Institutional investors always have more data (or at the very least, data before you do – which could even be by a fraction of a second), faster computers, better trading strategies which will always help them come out on top.
Remember that there are two parties to a trade. For every trade where you are buying and are sure that you are timing it right, there is another person who thinks that getting out at the moment is the best course of action. What one needs to consider is this: “What information does the other person have that I dont?”
3. Instincts and Emotions: Trading with instincts and emotions is one of the top reasons for the irrationality of the masses. Bringing emotion into your investing mechanism could result in huge losses. Investors should never get attached and fall in love with particular stocks and even your best performer should be a candidate for selling if something fundamental changes where the investment does not make any sense. 
4. Invest in what you know: ‘Invest in what you know’ has become a common theme in the investing world, which has also been perpetrated by the media. I disagree with this approach. Investing in a company just because you “know” their product doesn’t mean it can be a great investment. For example, I have heard many a times from gamers tending to think that a Xbox and PlayStation are fantastic products and are buying Microsoft and Sony are the way to go. However, during the life of Xbox 360, Microsoft was losing money on every console sold. Gaming has never been a breadwinner for Microsoft. Similarly, the Sony stock SNE has had a terrible run over years. Sony is a huge conglomerate, and even with its hands in so many pies, SNE has returned -17.5% in the past 5 years and -47% in the past 10 years.
Similar argument holds for geographical investments. Investors simply tend to stay invested in their own country instead of diversifying with investments in other countries.
5. Patience: Time is one of the biggest, if not the biggest factor in investing. An investment in a solid company which has a great business producing profits year-in-year-out will be your star performer. All you have to do is simply sit back and wait for your returns to compound over time.
6. Not sticking to the plan: Sometime also termed Performance chasing (although I dont like using that term for this issue) and shifting focus to the current theme that seems to make sense momentarily and abandoning your original plan to jump on the latest bandwagon – this approach can also incur losses in an investor’s portfolio.
7. Fees: Fees add up. A lot. If investments fees arent kept in check, returns can be diminished by thousands of dollars over a lifetime. It is for this reason that I discourage using mutual funds and instead use low cost index ETFs for better returns.

What do you think of the list above? Are there any other common mistakes that I have missed? Share your thoughts in the comments below.

Getting Started – Asset Allocation

Diversification of assets is one of the major pillars of investing. If and when disaster strikes, you should be in a position to protect your assets. Diversification of assets has been proven to protect people’s portfolios time and again and something that should not be ignored.What do you diversify with?

  • Cash – Emergency funds, savings, GICs etc
  • Equity – an asset allocation of 25%-75% is recommended
    • Canadian equity
    • US equity
    • International (rest of the world) equity
  • Bonds – an asset allocation of 25%-75% is recommended
    • High grade bonds
    • Inflation protected bonds such as TIPS or real return bonds
    • Corporate bonds
  • Commodities – such as gold, oil etc can be a good way to hedge to protect against inflation
  • Real Estate – can be either your own home or via a REIT. Also acts as a great hedge to protect against inflation.

My Asset Allocation

I realize that my current portfolio goes against the recommended value of holding atleast 25% bonds. This is because of the extraordinary times that we are going through, with the bond yields being extremely low. In addition to that, once the interest rates start rising again, the bond funds lose value – so I am expecting some negative returns there. Nevertheless, I hold approximately 11% of my portfolio in bonds. I have increased my holdings in the next best thing to bonds with income producing equity sectors such as utilities and consumer staples.

Another way to looking at the diversification is to look at the geographical diversification – so that I am protected against disasters in one country. For e.g., if I was completely invested in the US market back in 2007-2008, I would have lost a lot more money than I did. With part of my portfolio in Canadian equity and international equity, I was able to protect my assets. My current geographical diversification looks as shown above.

What does your diversification look like? Are you diversified enough?

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Getting Started – Where do I go from here

If you have gotten started with some investing and are comfortable with it, you are already on your way to financial freedom 🙂 In the first post of this Getting Started series What to invest in, I covered some basics on the advantages of index funds for people starting out. ETFs are comparatively better than mutual funds, but over the course of years, the fees do add up (click here for my post on fee comparison) and more often than not, you are better off picking quality companies to invest in.

Dividend Growers

There are multiple schools of thoughts on picking the companies to invest in – but my choice is to invest in dividend growing companies. These are generally companies that are mature and stable; have been paying dividends constantly over the years and growing their dividends on year-to-year basis. These companies almost always perform better than the index funds (when you pick the right combination and balance your portfolio with appropriate asset allocation) both in the bull and bear market.

It is important to keep in mind that you want to own these stocks and not rent them – i.e., invest for the long term and stay the course.

Choices

You can get ideas for stock picking by looking up lists such as the following:

Want more ideas for picking dividend stocks? Check out which stocks own by the big name ETFs such as
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Getting Started – When to invest

The short answer is “Now”. A more careful detailed look at this would sound more to the tune of “Depends…”.
There have been countless studies and you can find various examples on the internet of how your nest egg can grow by a substantial amount depending on how many years you save. The bottom-line for every single calculator is Start Early. Your returns compound over the years and have a snowballing effect. As a simple example:

Lets say you invest $5,000 every year and manage to get a 8% return on your investments. If you start at the age of 25, you end up with $615,580 at the age of 60. If you start at the age of 35 instead, you end up with $431,754 at the age of 60. That amounts to a whopping $183,826.

That being said, here are a few considerations to keep in mind:

  1. Rank and pay down the high interest debt: It is highly unlikely you will be able to invest and get better returns than the interest rates charged by the credit card companies, which are normally at 18-20%. So, first things first – get rid of your bad debt.
  2. Analyze & Re-Analyze Goals: Each person’s investment goals are different. You need to analyze and annually re-analyze your goals to make sure your savings, debt payments (mortgage, car loan etc) and investments are matching your goals.
  3. Save consistently: Consistent monthly savings (using automatic transfer programs) is an important part of investing. Most people who say “I will to save and transfer whatever is left at the end of the month” seldom have a healthy financial future. The old adage of ‘Pay yourself first‘ is popular for a reason. If you treat your savings like a bill payment, where you periodically and automatically save, you can build on your nest egg.
  4. Invest consistently: It is a fools game to try and time the stock market. Consistently investing by finding the best available value at the time almost always provides better results. If you feel that one method of investing suits your needs and you are happy with the risk vs. reward balance, stick to it. If you ever feel the need to gamble and have some extra money, open a new account for it without taking anything out of your retirement fund.
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Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.