Investment Intelligence… and All the Mistakes to Avoid

I’d like to impart to you my own collection of accumulated investment intelligence…and all the mistakes to avoid. Do you feel desperate right now?  If so, it’s understandable.  It’s frightening out there.  The market.  The media.  Your investment statements.

Everywhere you turn you see negative, scary messages.  It’s no surprise that you might feel desperate at times.  The problem is that desperate people do desperate things and that can cost you — big time.

Let me give you an example.

Anderson, like many other people, suffered painful investment losses last year.  He invested “conservatively” and still lost over 20% in 2008.  He wanted to make up for those losses as quickly as possible.  He invested 40% of his portfolio in one stock —  a major financial institution.  The stock price was very low and he was “sure” it would come back.  He thought the risk of losing money on that investment was very low.

What happened of course was that as soon as Anderson made this investment, it dropped 20% — in one day.

Maybe Anderson’s investment will eventually work out.  But even if it does, I believe this type of action is a mistake.

Remember, Anderson is a conservative investor.  Does investing 40% of your portfolio in one stock sound like a conservative move? Does it even remotely sound like an investment strategy that works?  Even if you wouldn’t put a large sum in any one investment, we can all  learn a great deal from Anderson.

Here are the steps I recommend for building up your own investment intelligence, and here are all the mistakes to avoid:

1.  Get present and get out of your emotion.

Anderson doesn’t rely on the money in question for income.  He has no plans to use the capital either.  The losses, while painful, don’t impact him in any meaningful financial way right now.  He probably won’t access the income from the account for at least another five years.  It would be nice to “fix” the portfolio immediately, but that’s an emotional need rather than a financial need.  As a result of trying to feel better, he took on much higher risks.

2.  Don’t kid yourself.

If you think any investment is a “sure bet,” you haven’t been following the news over the last 14 months.    If we’ve learned anything, we’ve learned that every investment has an element of risk.   The quicker the expected investment return, the higher the risk.  This is true no matter what investment you are thinking of.

3.  Honestly assess what your financial needs are right now and invest accordingly.

The right move for you right now could be to do nothing.  The right move might be to move everything into cash.  The right move might be to put 40% of your money into one stock (I doubt it…but it’s possible).  It depends on who you are and what your financial needs are.  Don’t ever forget your goals, objectives  and risk tolerance when you invest.  Never suspend your reality because of greed or fear.

Have you been tempted to abandon your investment strategy because of fear, impatience or greed?  Do you agree with these ideas?  Why or why not?