Preventing Investment Mistakes

Most investment mistakes are caused by basic misunderstandings of the securities markets and by invalid performance expectations. The securities markets move in totally unpredictable cyclical patterns of varying duration and amplitude. Evaluating the performance of the two major classes of investment securities needs to be done separately because they are owned for differing purposes. Stock market equity investments are expected to produce realized capital gains; income-producing investments are expected to generate cash flow.

Losing money on an investment may not be the result of an investment mistake, and not all mistakes result in monetary losses. But errors occur most frequently when judgment is unduly influenced by emotions such as fear and greed, hindsightful observations, and short-term market value comparisons with unrelated numbers. Your own misconceptions about how securities react to varying economic, political, and hysterical circumstances are your most vicious enemy.

Master in these Ten Risk-Minimizers Tips to improve your long-term investment performance:

1. Develop an investment plan.
2. Learn to distinguish between asset allocation and diversification decisions.
3. Be patient with your investment plan.
4. Never fall in love with a security, particularly when the company was once your employer.
5. Prevent "analysis paralysis" from short-circuiting your decision-making powers.
6. Burn, delete, toss out the window any short cuts or gimmicks that are supposed to provide instant stock picking success with minimum effort.
7. Attend a workshop on interest rate expectation (IRE) sensitive securities and learn how to deal appropriately with changes in their market value in either direction.
8. Ignore Mother Nature's evil twin daughters, speculation and pessimism.
9. Step away from calendar year, market value thinking.
10. Avoid the cheap, the easy, the confusing, the most popular, the future knowing, and the one-size-fits-all.