Common mistakes all investors make
Similar to the sport of baseball, to become a successful investor, one must do their best to limit errors, all the while recognizing that they are certain to occur. Some of these errors are unavoidable. However, this column focuses on those that one could avoid through proper research, education and planning. As you will read below, investors would also be well- served to set aside their egos. That said and to be fair, some mistakes investors commit can be placed squarely on the advisor. For sure, not every investment we select for our client proves profitable. However, acting as a fiduciary and according to the definition by the Department of Labor, we must act in the best interest of our client, putting their interest above our own. Not all are held to that same charge.
One of the fundamental avoidable errors committed by investors is in not knowing the sales charges and/or internal expenses associated with your investment into a mutual fund or Exchange Traded Fund (ETF). Today, there are many ways in which a mutual fund distributor can be compensated for their marketing expenses. However, for the purpose of this column and generally speaking, there are two different ways mutual funds can be marketed, either through a sales force or directly to the consumer. Those that are marketed through the efforts of a sales force are referred to as loaded funds. These funds pass along sales charges in one of three ways – by charging commissions to get in, to get out or through levying higher internal expenses. Class A shares are those that charge a commission to get in at the time of deposit, usually in the range of four to five percent of the ini- tial investment. Other funds marketed by brokers or advisors levy fees if the investment is sold within a certain timeframe, usually seven years. These are known as Class B shares and carry an internal expense ratio that is usually one percent higher than it would be otherwise. Finally, Class C shares are also marketed by brokers or advisors who are compensated through the levying of an internal expense, usually one percent per year for the life of the investment. In our opinion, this is the most cost efficient way to purchase a loaded mutual fund through a broker. However, THE most cost efficient way is to invest in a pure no-load fund or one that levies no sales fee to get in or to get out and which does not bump up their internal expense ratio..
Just a reminder, we be- lieve the mistake the investor makes is not by investing in a mutual fund that carries a commission, but rather by not being aware (or made aware) of how that commission may limit future growth, may limit investment flexibility should they want to redeem shares or exactly what those internal expense are.
Another mistake that investors make is what we refer to as “waiting to break even.” This occurs when the price per share of the security declines relative to the purchase price or a recent high. This may occur as a result of general market weakness or more problematic an issue within the industry in which your investment competes or the investment itself. Despite the fact that one may recognize the reasons for making the initial investment are no longer valid, they nonetheless continue to hold, waiting to break even, erroneously believ- ing that they are not losing “real” money until they sell. This is a mistake. An investor must continually ask his or herself the following questions. Given the information that I now have, would I make this same investment now? Does this investment have potential worthy of an investment or am I better off investing elsewhere? If the answers to those questions are no then you cut your losses immediately and move on.
Remember to recognize a couple of fundamental principles of investing. Number one, you will frequently make investments in which you end up losing money. However, keep in mind that a .300 hitter is in the hall of fame despite the fact that they make outs seventy percent of the time. What is of importance is to have more winners than losers over time. The second fundamental principle of investing is to “sell your losers and let your winners run.” Don’t wait to get even. You may be waiting a lifetime while the overall market passes you by.
Please note that all data is for general information purposes only and not meant as specific recommendations.
The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial adviser. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial adviser prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.