Avoid These Three Costly Investing Mistakes

Barron’s, that weekly chronicle on the doings of the financial markets and the active investment managers who futilely try to beat it, published an article this week advising investors on how to avoid the most common and costliest investing mistakes.

The three biggest errors, according to Barron’s, are failing to diversify wisely, trying to time the market, and overpaying on investment expense. (Sounds like the average active manager.)

Researchers for Barron’s calculated that an investor with a $1 million portfolio would have missed out on $375,000 of gains during the 10 year period ending January 2008 by making these three serious errors. This same Barron’s portfolio “wisely” invested and free of these three errors had an annualized return of 6.86%. Factoring in the three serious errors shrunk performance down to 4.59%.

Our own 60:40 Asset Class Portfolio invested over the same period of time, paying the normal advisory fee would have returned 7.59%. No reason to calculate the portfolio with the errors, as Asset Class investors know not to make those!

Here are some of the top reasons cited for avoiding these three investment mistakes:

Neglecting Asset Allocation
The best way for an investor to achieve the highest risk-adjusted return is to allocate broadly across different asset classes. As one advisor quoted in the article stated, “we need a portfolio with assets moving in different directions. The best analogy is: Look at is as a perennial garden. If everything is in bloom at the same time, that probably means everything will wilt at the same time.”

Timing the Market
Investors and pros alike have a dismal record on being able to time the market. Don’t even try.

You don’t need to be near a long-term market top or bottom to do serious damage to your portfolio. Consider these numbers. From 1980 through 2006, an investor who missed out on the five best-performing days in the S&P 500 Index wound up with 26% less than someone fully invested during the entire period. If the same investor missed the 30 best days the value of their account would have been reduced by 73%.

Paying Too Much
Front-end loads, 12b-1 fees, and high mutual fund operating expenses are major drags on portfolio performance. Also watch for excessive trading, which can pull down portfolio performance and increase your tax bill.

While no investor is loving the short-term performance of the markets lately, Asset Class Investing clients can rest comfortably knowing that they have avoided the biggest mistakes outlined by Barron’s and are positioned to earn all the markets offer, which we know in the long-term is likely to be a very healthy return.