Even the smartest of investors do make mistakes. The evidence is Peter Mallouk's own experience as a wealth manager. Mallouk has outlined the common errors that even smart investors commit while dealing with their finances. Here are the five listed out.
Constantly into active trading
: Active trading refers to buying and selling of stock regularly and quickly, which sits in contrast to choosing investments carefully and then keeping invested into it for the long-term. The idea in play behind active trading is to outperform market. However, Mallouk pointed that the stock market works in lines of a Las Vegas Casino. In casinos, where house always wins, it is the brokerage houses that always wins in trading. The activity has both winners and losers, but time is crucial as it is seen that winners eventually become losers over time.
Investing on the basis of market momentum
: Usually, investors who want to time the market believe in investing in an upswing and withdrawing during downtrends. But, Mallouk believes that market timing does not work. Rather it divides the investors into two groups, one of the liars and other idiots. He says that liars make money by making predictions, while idiots are those who only remember their times of victory. However, irrespective of timing, one should always be participating in the market as sitting on the sidelines could mean missing the upside.
Right understanding of financial information and performance
: There is too much of financial information, but it is not necessarily clear or is understood correctly at all times. It is not necessary that a successful portfolio or a hedge fund will outperform each time. The investments should be on the basis of individual needs and not just on the basis of past performance of the fund or portfolio.
Overconfidence could get in the way
: Mallouk wrote that a typical investor is not an expert, but believing so could get one in the trouble. Emotional factors like greed, overconfidence, fear or mental bias could be a great hurdle for an investor.
Selection of a financial advisor
: More often financial advisors do much harm to a portfolio than good. An investor should seek information about the compensation structure of their advisors or in case of building a plan should solicit help of a Certified Financial Planner.