Avoiding self-inflicted financial wounds

Investing, like life, can be seen as a process of making as few mistakes as possible (or, more accurately, learning from them when you are young and it doesn’t cost you much) rather than hitting the home run. After all, how much truly great moments do we have as investors? One? Maybe two?  Just remember that a series of prudent moves can be wiped out by one stupid one. In turbulent times such as this, our propensity to panic tends to increase.

As we all watch the financial markets unravel this week, we, the mere amateur investors, have to be aware that capital preservation is more about avoiding self-inflicted wounds than making one great move. Before anyone presses the panic button, let’s remember some of the more common investing mistakes:

1. Changing your strategy midway through the game. If you have ever worked in a large corporation, you may have experienced the bosses spending months promoting some new great strategy then mere months into implementation they ditch their plans for some new great strategy (see multiple marketing programs, multiple IT platforms etc.). We roll our eyes at managerial incompetence then go home and do the same thing with our portfolio. If your investing strategy is sound, don’t abandon it because it doesn’t work for the short-term. Fundamentally sound investing strategies work over the long-term.
2. That “doing something” will solve the issue. The harsh truth is that we cannot control many aspects of our lives but we create the illusion that we can by doing something. If you have invested in fundamental sound products or adhere to fundamentally sound investing strategies, doing something for the sake of doing something is not going to help the situation. It may worsen it. So don’t be a doer for the sake of being a doer.
3. Listening (and acting) on non-contextual advice. If a 63 year widow told you to move your entire equity into bonds would you do it? If I was 63 and unmarried then I would strongly consider it. If I was 33 years old and married, probably not. The context of the advice giver is different than your own so filter the advice accordingly. Don’t run to just anybody for advice. Ask someone who is in a similar situation as yours who you trust on money issues.
4. There is a magic bullet solution. To paraphrase the L.A. Lakers’ basketball coach and zen-master, Phil Jackson, your problems in life don’t go away, they change. You don’t solve your financial (and life) issues with one magic bullet; problem-solving is multi-tiered and requires a lot of time. Buying into a magic bullet solution is an “all your eggs in one basket” approach to investing which should be highly avoided.
5. If I avoid the issue, it will go away. To quote my boss, “you can’t solve a problem unless you assess where you are at.” If you have an issue don’t ignore it thinking someone will take care of it for you. Be pro-active and tackle it by first facing up to it.

Anyone care to share common investing mistakes to avoid?