Why do so many investors get the trading mantra of buy low and sell high the wrong way around?
According to a poll conducted by the Chartered Financial Institute in Virginia, investors continue to make basic mistakes in managing their money, despite the proliferation of money programmes dominating the airwaves.
Performance-chasing is one of the errors that accounts for poor returns. 'Too many people invest in the asset class or asset type that did well last year ... assuming that because it seems to have done well in the past it should do well in the future,' says Beth Hamilton-keen, a CFA with TAL Private Management in Calgary, Alberta.
Twelve common mistakes cited by the poll include failing to diversify by investing in individual stocks rather than diversified index funds or mutual funds; lacking an investment strategy; and churning investments through too frequent trading.
Acting on tips and media sound bites can also lead to trouble. 'It is a far too common mistake,' says Todde Lowe, a CFA in Louisville, Kentucky. Buying on stock gossip leaves the average investor outgunned against professionals who can trade the market using a wealth of technical information. A useful rule of thumb is if you've heard it, others have too and the information is already priced into the market.
Being aware of unrealistic expectations can also save a lot of pain, according to Robert Johnson, a vice-president with the CFA institute. 'Expecting returns of 20 to 25 per cent annually is a set-up for disappointment,' he says, adding that a lack of patience leads to excessive risk-taking.
