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5 Common Mistakes Most Investors Make - Hope You Can Avoid Them

12/31/2014

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At this time of the year, people tend to look back past year's performance and make predictions about next year's performance.  However, in this 2014's last blog post, I would like to focus on the basics of investing.  If you are keenly aware of these 5 common mistakes most investor tend to make, you will have a high chance of being a wise investor in the coming year!

1. Try to pick winners and losers

Unfortunately, for most ordinary investors, picking the winners and losers and buying and selling them at the right time is mission impossible.  Just look at the fact – in 2014, few active fund managers could even beat their benchmark – S&P 500.  But people still keep trying to do so, apparently confusing some of the past lucks with skills.

2. Short-term oriented

Many people make New Year’s resolutions, only quickly forget about them.  Worse, many people don't even make a New Year's resolution, let alone a long term plan.  Even if you do have a long term plan, did you let your short-term emotions, which are heavily influenced by the daily news media reports, TV commentators’ talks, online chatters, etc. derail your long term plan?  One quick way to test - did you sell at the bottom of the market crash in 2008 and scare of going back to it, therefore missing the great come back story?

3. Not diversified enough

When is the last time you took a comprehensive view of your portfolios, which are probably spread across many different places?  Does your portfolio look like a concentrated bet?  Do you own asset classes that are less correlated to each other?  Maybe large cap did well this year, but it doesn’t mean you should exclude other asset classes such as small caps, foreign stocks, REITs, etc.  The reason is simple – no one knows when the next best performing asset class will be next year. 

4. Knowing but actually forgetting costs 

You thought you know costs drag down performance.  But did you count your past year’s transactions?  How many buys and sells have you executed?  How much trading cost did they drive?  Did you look at the funds’ expenses before you buying them?  Did you use margins?  Did you factor in taxes when you calculate returns?

5. Forget Time is your best friend

Compounding is probably the single most important factor determining an investor’s long term return, but only time can make it happen.  Using dollar cost averaging method is one way to ensure Time is actually with you, not against you.  But how many times did you stop at the time the market crashed and kept on chasing when the market peaked?

Happy 2015!
Hope you will make wise personal finance decisions in 2015 and beyond!
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