13100 Skyline BoulevardWoodside, CA 94062Tel: 1-800-568-5082Fax: 1-650-529-1341Email: firstname.lastname@example.orgWebsite: www.fi.com M.01.144-Q205
Are you a self-directed investor? If so, are you completely satisfied with the current perform-ance of your investments? Or have you struggled toconsistently meet your investment goals over time?
Chances are you feel that some level of improvementcan be made. We all typically seek the same generalobjective: to maximize returns while protecting ourselves from downside risk. But for many, it isbecoming increasingly difficult to reach this objectiveas we are flooded with more information and facedwith more investmentalternatives. Ultimately, the landscape has become more complex.
Fortunately, many investing fundamentalshave remained unchanged.Through more than thirty years of managingmoney for many prestigious institutions and individuals, I have learned some important lessons on what brings success and what can lead to failure.
Through this guide, it is my objective to help investors recognize these common mistakes andprovide insight on how to avoid them. In doing so,Im confident the guide can help you increase yourchances of reaching your investment goals.
Common mistakes can add up and ultimately diminish the value of your portfolio. Its my goal to increase investors awareness of common pitfalls and help you protect your precious assets.
Kenneth L. FisherCEO & Chief Investment Officer, Fisher InvestmentsForbes Portfolio Strategy Columnist
1Mistake #1 ...and how to avoid it.Underestimatingtime horizon foryour assetsHow long do you thinkyoull live? How about your spouse? Most people are far too conservative in estimatingthe length of their lives, and that can be a problem whenplanning your financialfuture.
2Mistake #2 ...and how to avoid it.Misaligning invest-ment objectives andportfolio strategyAligning your portfolio strat-egy with your objectives is acritical factor in determininglong-term investing success. This may sound obvious,but many investors employstrategies that work againsttheir objectives.
It's a simple fact. Breakthroughs in medicine happen so often we fre-quently dont even hear about them. As the effectiveness of diseasetreatment, improvement in general nutrition, and higher standards ofliving continue to progress, most people will live longer than theythink they will.
This means there are new and costly healthcare methods availablefor increasing life span as the population ages, which raises the costs ofhealthcare and of living longer.
For these reasons, we find that most people miscalculate on the lowside how long theyll live. As a result, many fail to make proper plansto accommodate their longer lifespan. Many run the risk of depletingtheir funds long before their lives are over.
Its important to have a sound financial strategy that will provide foryour financial stability and income needs. Or perhaps youre aiming togrow your assets to gift to loved ones and family members who surviveyou. In either case, a proper perspective on time horizon is vitallyimportant.
Acommon error that investors make is improperly judging risk.Generally, the longer the time-horizon of your investments, themore risk youre able to take on. But a typical mistake that investorsmake is to take on too little risk. That's right. They focus on short-term volatility rather than long-term probabilities of achieving theirobjectives. This ultimately causes their portfo-lios to underperform their goals.
For example, persistently loading up the port-folio with low coupon Treasury bonds, due to fearthat stocks will drop in the short term, will barelygenerate a return over the rate of inflation. Thisreduces the odds of achieving a long-term goal ofgrowth especially if withdrawals are also anticipated.
Conversely, those with short time horizon objectives are often overly exposed to risk, creating a danger of asset loss amid short termvolatility. This can put their entire financial future in jeopardy.
...short time-horizon objectives areoften overlyexposed to risk...
3Mistake #3 ...and how to avoid it.Confusing incomeneeds with cashflow needsIncome and cash flow arenot the same thing, although many investorsthink they are. In fact, thetwo different concepts andthe distinctions betweenthem are extremely important.
Put simply, cash flow is how much money you need for livingexpenses and other personal uses of cash. Income, on the otherhand, is the amount of dividends and interest earned by a portfoliothat, in the case of a taxable account, you will pay current incometaxes on. Whats the important difference?
The way in which you generate income can have a tangible effect onthe growth of your assets and on the taxes you pay, which impacts yourability to get cash flows.
Its a mistake to think that you should get your needed cash flowfrom income only and never touch principal. This is an emotional biasthat many simply cannot overcome. Instead, you should focus on totalafter-tax return. For example, selling stock to meet income needs canallow you to stay fully invested and create homegrown dividends byselling selected securities.
Compared with some dividends, and interest from fixed income,selling stock may offer tax advantages. That's because the transaction istaxed at the capital gains rate rather than the clients marginal rate.Harvesting losses can also be tax advantageous.
4Mistake #4 ...and how to avoid it.Overlooking unintended riskfactorsManaging a diversified portfolio of assets can befraught with hidden risksmany investors aren't awareof. Too often, we find thatportfolios are over-exposedto certain risk factors thatwere never recognized.Don't let this happen to you.
Unintended concentration produces excess risk. This exposes youto larger fluctuations and the possibility of accelerated losses. Factors such as sector, country, currency, valuations, and size all play
a role in a properly diversified portfolio. What's more, some securitiesare highly correlated for other reasons (like interest rate movements orcommodity prices).
For example, let's say you own one Japanese stock and one Englishstock. These seem unrelated, right? But have you considered the revenue source for each company? Are they both sensitive to interestrate fluctuations? Perhaps their performance is similarly tied to currency movements.
Too high a concentration of any of these or other factors can exposeyour assets to risks you never intended!
5Mistake #5 ...and how to avoid it.Ignoring foreignsecurities marketsThe United States isnt theonly country worth investingin. In fact, it only accountsfor about half of the value ofworld equities in terms ofmarket capitalization. As a result of globalizationthere are a great number ofinnovative companies andinvesting opportunities available to take advantageof. Don't make the error of limiting yourself!
It's a mistake to think that you're diversified properly by simplychoosing stocks across differing sectors. Thats not enough. Returnof stocks is partially related to the overall economic performance andpolitical climate of the home country. A sagging domestic economymakes it difficult for many companies to thrive. Without giving con-sideration to country and region, you may incur the excess risks associ-ated with doing business in that country.
Many average investors suffer from home country bias," whichmeans they tend to invest only in the country they live in. For exam-ple, if you were to purchase stocks diversified across all sectors locatedwithin the US, performance might often depend more upon how thecountry performs than the quality of the individual companies chosen.
Diversification is a key part of building a well-constructed portfolioto grow your assets. Investing abroad helps to strengthen your portfo-lio by expanding the efficient frontier. It also creates a larger pool ofpossibilities from which to find worthy investments.
6Mistake #6 ...and how to avoid it.Forgetting the fundamentalimportance of supply and demandThe fundamentals of supplyand demand of securities areeasy to overlook. Analystsand pundits cite an endlesslist of theories about whatmechanisms drive stockprices. But the simple factremains: supply and demandof securities will always bethe fundamental driver ofshare prices.
Basic economic theory states that the relative supply and demand forgoods in an open market will determine their prices. For example, holding supply equal, the demand for ski equipment increasesaround the winter months, and thus the price for skis increases at thattime. But in the other months of the year, when people ski less, demanddecreases and prices fall. Stocks are no different: we think it is common sense that their prices fluctuate based on demand in the short term.
Supply of equities is relatively fixed in the short run because it takestime for companies to create new issues of stock. Therefore, shifts indemand primarily cause price changes in the markets in the short term.However, supply has the ability to change almost infinitely in the longrun, making it the dominant factor in stock prices over longer time peri-ods. Understanding the relationship between the supply and demand ofsecurities is vital in choosing whether to be invested in stocks or not.
The ability to accurately track, analyze, and evaluate this fundamentaltenet of economic theory is vital in our view to making successful forecastsin the markets because it allows you to screen out unimportant noise.
7Mistake #7 ...and how to avoid it.Making investmentbets based only onwidely knowninformationWhat sources of informationdo you use when consideringan investment? With thepossible exception of thehot tip that you pick up ata dinner party, your infor-mation probably comes fromsources that are widely avail-able. And thats a problem.
Whether its the morning newspaper, research from your broker,commentary on radio, television or the Internet, or any othersource made available to the public, theyre all essentially useless.
Why? Because the markets are efficient discounters of all widelyknown information. This means that as soonas a piece of information is made broadlyavailable to the public, its reflected in shareprices. But despite this fact, many investors stillmake the mistake of trading on widely knowninformation.
In order to generate excess returns, you must either know somethingeveryone else doesnt or interpret widely known information differentlyand correctly from the crowd. In other words, something that isntalready reflected in share prices. The ability to generate this knowledgetakes experience, research, and discipline.
...you mustknow some-thing thateveryone elsedoesnt.
8Mistake #8 ...and how to avoid it.Experiencing over-confidence in yourinvesting skillsWhen investing your personal assets, its natural to experience a lot of emotion as you watch the ups and downs of themarkets each day. After all,its your financial futureyoure dealing with. But for that very reason, aslew of cognitive biases comeinto play, clouding peoplesjudgment and hamperingtheir ability to make ration-al, impartial decisions.
Let's face it. The human brain is not wired for investing. Our StoneAge ancestors evolved and survived by focusing on whatever helpedthem hunt and gather food. Their biases shaped their beliefs, creatingand reinforcing their understanding of the world.
The fact is, like our ancestors, we see the world today through ascreen of biases. For example, most investors will focus on their suc-cesses and try to forget the mistakes theyve made, consistently con-firming their personal views rather than maintaining objectivity.
One particular shortcoming of investors is their innate tendencytoward over confidence. We naturally put up barriers that allow us toforget the mistakes weve made in the past while at the same timefocusing on the successful investments weve made which makes usoverly confident. This leads to taking on excessive portfolio risks.
None of us are immune to these biases. Thats why its vital to createan environment for investing that is detached from emotion onethat relies on data and impartial analysis to make the right decisionsfor your financial future.
Its difficult to avoid all investment pitfalls evenfor the savviest of investors. That's because manyinvestors simply dont have the time to process thevast amount of information available today andapply it to their complex investment needs.
For almost two decades, Fisher Investments hasbeen helping high net worth individuals achievetheir investment goals. Through bull and bear mar-kets we apply a dynamic and individualizedapproach to portfolio management. Our long term track record speaks for itself. In addition, ourclients value our exceptionally high level of service,personalization, and transparent fee structure.
We invite you to find out more about what makes Fisher Investments unique. Even if youre not currently considering doing anything different withyour investments, you owe it to yourself to learnmore about our services as a potential alternative.Simply call toll free 1-800-568-5082 to speak witha Fisher Investments representative.
Have you made any of these mistakes?
Noted founder and CEO,Kenneth L. Fisher has written three finance booksand numerous articles inbusiness and scholarly journals. He is most widelyknown for his ForbesPortfolio Strategy columnwhich hes been writing fortwenty years.
Investments in securities involve the risk of loss. Past performance is no guarantee of future returns.
13100 Skyline BoulevardWoodside, CA 94062Tel: 1-800-568-5082Fax: 1-650-529-1341Email: email@example.comWebsite: www.fi.com M.01.144-Q205