Whether you are a self-directed investor or your investments are completely managed by a 3rd party, chances are good that you feel that some level of improvement can stand to be made with the current performance of your investments. We all typically seek the same general objective: maximize our returns while protecting ourselves from downside risk. However, it has become increasingly difficult for some people to reach this objective as we are flooded by more information and faced with more investment alternatives. Fortunately, many investing fundamentals have remained unchanged, but problems and mistakes occur when you don’t take these fundamentals into proper consideration.
1. Underestimating The Time Frame Of Your Assets
Advances in health care and other factors will likely result in an under estimation of just how long someone expects to live. According to recent information, people are living longer now than ever before, and many people can and should anticipate spending as much as 1/3 of their life in retirement. This means that it is more important now than ever before to properly understand and plan for the limitations and options of your assets and asset investment strategy.
2. Misaligning Investment Objectives and Portfolio Strategy
Aligning your portfolio strategy with your objectives may sound obvious, but many investors employ strategies that work against their objectives. Common mistakes include taking on too little risk (and not keeping up with inflation) or focusing on short-term horizon objectives that are often overly exposed to risk – creating a danger of asset loss during a short-term period of volatility.
3. Confusing income needs with cash flow needs
Income and cash flow is not the same thing, even though many investors think they are. Cash flow is how much money you need for living expenses, whereas income is the amount of dividends and interest earned by your portfolio subject to taxation. The method in which you generate income can have a tangible effect on the growth of your assets, as well as on the taxes you pay, both of which impact your ability to get cash flows.
4. Overlooking unintended risk factors
Many investors are unaware that managing a diversified portfolio of assets can be fraught with hidden risks or over-exposed to certain risk factors that were never properly recognized. Factors such as sector, country, currency, and size can all play a role in a properly diversified portfolio.
5. Making investment bets based only on widely-known information
Investors often forget that the markets are efficient discounters of all widely-known information. This means that as soon as a piece of information is made broadly available to the public, it’s reflected in the stock price.
6. Experiencing over-confidence in your investing skills
It is basic human nature that most investors will focus on their successes and try to forget the mistakes they’ve made, consistently confirming their personal views rather than maintaining objectivity. Related to this is our innate tendency towards overconfidence – potentially leading to excessive portfolio risks.
For further, more detailed retirement planning advice, please seek the help of your certified financial planner.