Posted on: Thursday, August 5, 2004

Investors get tips to correct 'mistakes'

By Meg Richards
Associated Press

NEW YORK — Every investor is unique, but financial advisers know of one way we are painfully alike: We tend to repeatedly make the same mistakes.

The CFA Institute, a nonprofit group that certifies financial analysts, recently asked its senior members to share their thoughts about the most common and costly missteps individual investors make. Their informal survey generated a list of a dozen blunders.

• No strategy: To build a strategy, you should consider how much you're able to invest, how much you can add to it over time, how much time you have to reach your goals and how much risk you're willing to take. Before you do any of that, however, make sure you have a budget, said Jeanie Wyatt, chief executive of South Texas Money Management in San Antonio

• Too little diversity: You might like the idea of owning a slice of a company, but single stocks are much riskier investments than diversified mutual funds. The best defense against market shifts is to maintain a broad portfolio that encompasses all the different asset classes and investment styles. But don't confuse mutual fund diversity with portfolio diversity — owning many different funds that are similarly invested is not an adequate protection against risk.

• Investing in stocks instead of in companies: The only reason you should buy a stock is because you believe the company has sound fundamentals and positive long-term prospects, not because you're hoping to snatch a profit from day-to-day price shifts.

• Buying high: Most of us have heard the old Wall Street adage, "buy low and sell high." Many novice investors get this backwards by "performance chasing" — not a smart strategy. This is when you invest in hot sectors that have had a good run and are likely past their peaks.

• Selling low: The other side of buying high — holding onto a security that has declined because you hope to recoup your investment.

• Acting on tips: A whispered tip or investment advice heard on the radio could be worth checking out, but don't ever use something so flimsy as the sole basis for buying a security.

• Paying too much: You'd walk an extra block to avoid an ATM fee, or drive out of your way to save a few cents on gas, but do you know what you're paying to maintain your investment portfolio? Keep an eye on all transaction costs, including management fees charged by your adviser and expenses on your mutual funds. Tally them up and subtract the total from your annual return to get a clear picture of your performance.

• Neglect: Ignoring your portfolio or halting contributions after you've suffered a loss or when the market has turned lower is a mistake. You should make a point to review your holdings and your strategy on a regular basis. For most people, quarterly is good.