In
today’s shaky economy and jittery investment markets, investors may
well find that their best moves are not discovering the next big thing or a
fantastic value, but simply avoiding serious, and costly, mistakes.
Here are ten of the most common mistakes we see investors making everyday, and how to avoid making them yourself.
#10. Being “all in” on equities.
Stocks are what most people know the most about and where they have most of
their money. Some have only a handful of stock-filled mutual funds or ETFs in
their IRAs, pension funds, or 401(k)s. Others
actively manage their portfolios and have a basket of their own personal
picks.
But time and again we hear from investors who are effectively betting the
farm on equities, with 80%, 90%, or even 100% of their investable assets in
stocks. Ignoring their age, their risk tolerance, and even their better
judgment at times, these investors take the easy bait from their 401(k)
provider and load up on a “diversified” portfolio with a growth
fund, a value fund, a few index funds, some large-caps and some smalls, and
maybe even a dividend fund to boot.
No matter how you slice it, these are all stock market investments, and that
market is not a wise place to put the entirety of your assets. Nor a safe
one. When market sentiment moves in a big way, virtually everything flows in
the same direction – a painful truth for investors who endured the 2000
and 2008 crashes. During the century’s first decade, in fact, even
low-interest CDs outperformed the S&P 500 and other market indices.
The investors who did the best wisely kept a good portion of their portfolio
in cash or elsewhere outside of equities. They lost far less in the big crash
of 2008 and were able to quickly snap up bargains in the aftermath because
they weren’t flat on their backs.
Most of the people who remained “all in” in 2009 were the same
way in 2008, and the recent, massive market gains didn’t even get them
back to level. It was those who had the foresight to hang on to some reserve
cash who truly benefitted from the rebound. The same
is true today. Those with the free capital to invest after the next big
downturn will profit handsomely.
#9. Being “all in” on bonds.
The opposite of those who have piled all their money into equities because it
is easy or because they are chasing the phantom rally. Stock market jitters
have driven many out of the equity markets entirely and into the perceived
safety of bonds. However, bonds are anything but safe. In fact, with interest
rates at ridiculous record lows, they are probably at peak value right now.
With the potential for deflation still on the near-term horizon, some are
even making a speculative bet that bonds are the place to be, as they assume
that rates will absolutely have to stay low in that environment. Of course,
many of these same investors thought that housing prices would continue
upward forever.
When interest rates do rise again – and they will eventually –
bonds will be crushed as prices move in the opposite direction. And it can
happen quickly. It is sheer vanity to assume that one can exit just in time.
Especially since these things tend to go in the opposite direction precisely
when gains are the highest and we’re most pleased with our choice.
#8. Being “all in” on the U.S.
Few Americans look outside their borders for investment opportunities, and
that’s very nearsighted.
The U.S. economy is on the ropes, has been for some time, and might continue
to be for some time to come. Despite trillions of dollars in stimulus money,
it has failed to be very stimulated. We’ve entered a period of no to
low growth that could last for years. Thus putting all of your eggs in the
basket marked American Recovery is a risky thing indeed.
Even if the recovery charges ahead at full steam, it is safe to say that the
American economy, given its massive size, will not be the fastest or most
nimble in the world. For years now, even during the headiest of times, our
growth has been far outpaced by other countries.
More growth is happening in the emerging nations than anywhere else, and
world markets are more accessible than ever before. Investing in them gives
you exposure to that growth, along with a potential currency kicker (booking
bigger gains in other currencies if the dollar falls, or letting you benefit
when you convert back after selling if the dollar rises). China, India,
Brazil, Mexico, Korea, Taiwan, Argentina, Hong Kong, and Indonesia have all
outpaced the U.S. in GDP growth rates for the past decade, and appear poised
to continue to do so for some time – if not them, then other emerging
economies.
And speaking of currency, it makes no sense to hold all of your cash in
dollars. Washington’s spending spree bakes future inflation into the
cake. Which means future dollars will have considerably diminished purchasing
power. Diversifying out of the U.S., by holding currencies of countries with
more conservative fiscal policies, is a prudent thing to do.
#7. Not owning gold.
Gold was the premier investment of the past decade, increasing in value each
and every year. Parking as much as a third of your liquid assets in physical
gold that you directly control is imperative. Gold can’t go bankrupt.
It’s been the world’s universal currency since the invention of
money. And it cannot be inflated away by creating it out of thin air.
Gold is money. It embodies money’s two most basic
characteristics, serving as both a medium of exchange and a store of value.
In a sense, it competes with paper and digital “monies.” As their
value declines with inflation, gold’s will rise.
While even gold may be given to price swings based on fluctuations in
investor sentiment, the overall trend is up. Gold won’t provide the
spectacular returns of a stock that suddenly catches fire. But over time,
holding it is one of the tried and true ways of preserving wealth.
#6. Ignoring politics.
No one can afford to ignore what goes on in Washington. This is true even
though the vast majority of what happens there is useless if not downright
counterproductive in terms of improving the lives of ordinary citizens (i.e.,
those not well connected politically).
The federal government has insinuated itself into virtually every corner of
our lives. There are few days that don’t result in yet another rash of
rules and regulations. Businesses are forced to comply or die. They can
prosper or vanish dependent upon whether Washington favors or restricts them.
They may even be taken over and run by government itself, with taxpayer
money.
This is a dreadful situation, but trying to ignore it or fight it with your
investment dollars is not going to help your portfolio. If legislators
suddenly enact a hefty beet tax, then you can confidently invest in beets;
growers will be squeezed and the price of beets will go up. If they instead
announce vast new beet subsidies, then you want to go short; more beets will
be grown than are wanted, and the price will drop.
The same principle, unfortunately, applies to everything.
#5. Trusting the government.
This is the flip side of the previous no-no. Assuming that the people running
government economic policy know what they’re doing is lethal. Assuming
that government can fix anything that goes wrong is lethal. Assuming that
it’s just a matter of time before they figure out the right levers to
push is lethal.
Just look at what they’ve already done, and what the results are.
#4. Leveraging up.
If your investments are down, the absolute worst thing you can do is
leverage yourself in order to try to get back to even. Leverage is the single
most important reason the economy is in the mess it’s in today. You
don’t want to use that as your model. Do not throw good money after
bad.
#3. Making judgments based on anxiety.
There are two fears that drive investors to make really bad decisions. One is
the fear of missing out. Staying out of investment markets is difficult,
because that makes you no money. But there are times when preserving capital
can be at least as important as making a nice return on it. Times of great
potential volatility, like today. In those times, keeping at least some
capital poised patiently on the sidelines can be the wisest course.
The other is the fear of doing anything at all. Investment paralysis. Because
so little is clear right now, it’s easy to get caught up in this one
and opt out of the markets entirely. Or just idly sit back, holding what you
always have, because it’s easier than figuring out what you should
really do.
Both are deadly.
But even in the worst of markets, there are opportunities. For instance,
technology progresses, recession or no recession. Companies bringing out
breakthrough products are doing just fine. Other companies that steadily post
strong earnings can get beaten down to where they’re real bargains.
The trick is to be selective, find great companies, and buy them cheap. Let
market dips driven by other people’s anxieties bring the price down to
a level where it would be difficult to lose money, then
pounce.
Making investment choices simply out of fear is a really poor idea. But at
the same time, you don’t want to go to the other extreme, becoming
overconfident. Know that you cannot discover some magical formula for beating
the market. There isn’t one. Be always wary. Be skeptical. Continually
review your decisions to see if the basis on which they were made remains
sound.
Invest without emotion.
#2. Buying with the herd.
If you hear about it on CNBC, the money’s already been made. And
that’s all you need to know about that.
#1. Assuming the worst is behind us.
This is no ordinary recession. Never before have we seen a downturn that has
affected virtually the entire world at once. Nor a world where so many
governments have assumed such massive debt loads, leveraging their currencies
in a desperate attempt to defibrillate their economic hearts.
But it’s not working. Overspent governments from New York and Greece to
California and Spain are collapsing under their debts. Millions of unemployed
Americans have all but given up searching for jobs. And the U.S. government
is looking down the barrel of trillions of borrowed dollars it has no hope of
ever repaying.
Unlike a normal dip in the business cycle, this is a massive liquidation of malinvestment that resulted from decades of living beyond
our means, piling debt upon more debt. Those imbalances must be wrung out of
the system, and they will be. The financial market demands it.
Assuming that this is an ordinary recession, and that if you're patient your
investments will just “come back,” is the worst sin an investor
can commit today.
Make no mistake about it, the whole coming decade
will be a hard, bumpy ride. So take the steps today to prepare yourself and
your portfolio for what’s to come.
----
If you closely review the above-mentioned points, there’s only one
possible conclusion: You need to get at least some of your money out of the
United States. And that is not “Whenever you get around to it”
advice anymore – the window of opportunity is closing for those who
want to protect their assets from the long and ever-growing arm of the
government. Learn all about the 5 best (and perfectly legal) ways to
internationalize your wealth – details here.
Doug Hornig
Senior Editor, Casey Research
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