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The 8
Great Mistakes - How To Recognize Them
This is a list of the mistakes
that people actually make that prevent them
from realizing the average fund returns, and
netting them the average investor returns.
The Most Dangerous
Mistake = The one you are about to make
1. Over Diversification:
- Inability to make a
decision and buys everything without
building a portfolio.
- A portfolio actually takes
into account the “balancing effect” of
different styles of equities.
2. Under
Diversification:
- Narrowing the portfolio to
one idea
- Following the received
wisdom of the media
- Says, “This time it’s
different.”
3. Euphoria:
- Greed
- Equal to “Rapture of the
Deep” where the diver senses euphoria when
they are actually in real danger
- Loses the perspective that
principle loss is a real possibility
- Says, “Others are making a
killing. I can’t lose.”
4. Panic:
- The exact opposite of
euphoria and is caused by the same
mentality.
- Says, “There is no bottom
to the market. I have to sell before
Armageddon starts.”
5. Leverage:
- The easiest to justify with
math, but nobody actually does it
- In practice, most borrow in
order to under diversify, usually because of
euphoria
6. Speculating when thy
think you are investing:
- Always a response to price
trends. When they are going up, the
speculator rides the price up.
- Says, “This new
technology/idea/whatever will completely
change how things are done. I have to buy
now before it’s all gone.”
7. Investing In Yield vs
Total Return:
- Mistakes Yield as the only
source of income
- Believes that the fixed
income market is the only way to realize
income from a portfolio
8. Portfolio Decisions
based on Cost Basis:
- Unwilling to liquidate
small portions of the portfolio, pay the tax
and diversify an under diversified account.
- Says, “I can’t afford to
pay the capital gains tax.”
- Is taking the risk that the
drop in one stock price can be greater than
the cost of paying the CG Tax and
diversifying – there by preventing the drop
in one stock price loss.
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