What are the most common investor mistakes according to financial advisors?
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
“What are the most common investor mistakes according to financial advisors?”
According to a SmartAsset survey of financial advisors, the most common investing mistakes include: trying to time the market, lacking portfolio diversification, not addressing tax implications, forgetting to rebalance a portfolio, overlooking fees/expense ratios, and having high investment turnover (switching in and out of investments impulsively).
Financial advisors commonly identify several investor mistakes that can undermine investment performance and overall financial planning goals. Some of the most common mistakes include:
Overreacting to scary headlines and market fluctuations: Many investors become anxious and sell investments during market downturns, which can lock in losses and reduce long-term returns. Financial advisors recommend staying focused on long-term goals and avoiding impulsive decisions based on short-term market volatility.
If you invested $10,000 into the S&P 500 stock index on some of the scarier days in history —> just 10 years later your investment would have grown to:Pearl Harbor was bombed - 12/7/41 —> you had $44,855 (16.2% annual return)
The Soviets launched Sputnik - 10/4/57 —> you had $31,387 (12.1% annual return)
President Kennedy assassinated - 11/22/63 —> you had $19,729 (7.0% annual return)
President Nixon resigned - 8/9/74 —> you had $33,517 (12.9% annual return)
Black Monday market crash - 10/19/87 —> you had $56,514 (18.9% annual return)
Lehman Brothers bankruptcy - 9/15/08 —> you had $30,193 (11.7% annual return)
Trying to time the market: Investing is often seen as a strategy game, and it’s tempting to think you can time your moves to maximize gains and minimize losses. However, history and data have repeatedly proven that it is time, not timing, that matters most in investing. Trying to time the market — predicting when prices will rise and fall — is not only incredibly difficult but can also negatively impact long-term investment results.
Take, for instance, a hypothetical $10,000 investment in the S&P 500 stock index made on July 1, 2013. An investor who had stayed the course for 10 years, even through the two bear markets (declines of 20% or more) during that period, would have seen their initial investment nearly triple to $27,248 by June 30, 2023. This growth reflects the power of long-term, patient investing.
However, if the same investor had tried to time the market and missed some of the best days, the results would have been drastically different. For example, missing the 10 best days during this period would have slashed the portfolio's value by 45%, leaving them with $14,922. Missing the 20, 30, and 40 best days would have resulted in even more significant losses, depleting the portfolio to $10,838 (60% loss), $8,347 (69% loss), and $6,553 (76% loss), respectively.Focusing too much on short-term performance: Investors may focus too much on short-term performance and overlook the long-term potential of their investments. By maintaining a long-term focus, investors can navigate market turbulence more effectively. Whether it's saving for retirement or funding a child's education, remember that these are longer-term objectives. The path to achieving them should also be planned with the long-term in mind. And the emotional ups and downs from daily headlines and short term market gyrations? They're just short-term noise that the best investors ignore on the path to achieving long-term investing success.
Failing to diversify: Investors may concentrate their investments in a single asset class or company, which can increase risk and decrease returns. Financial advisors recommend diversifying investments across a range of asset classes and sectors.
Chasing performance: Investors may chase hot investment trends or performance, which can lead to overvalued assets — buying high — which often results in poor returns. Financial advisors recommend investing in a well diversified portfolio based on your long-term goals, time horizon and risk tolerance.
Ignoring fees and expenses: Investors may overlook the impact of fees and expenses on investment returns, which can erode long-term performance. Financial advisors recommend evaluating fees and expenses and selecting low-cost investment options when appropriate.
Failing to rebalance: Investors may neglect to rebalance their portfolios periodically, which can result in an unintended asset allocation and increased risk. Financial advisors recommend regularly rebalancing portfolios to maintain a desired asset allocation.
Overall, these investor mistakes can significantly impact long-term investment performance and financial planning goals. Working with a financial advisor can help investors avoid these mistakes and develop a more disciplined and informed approach to investing.
According to Vanguard’s Advisor Alpha research paper published in July 2022, a financial planner / financial advisor’s value may potentially add up to, or even exceed, 3% in net returns for their clients by helping clients avoid mistakes and focusing on an advice framework that includes:
a suitable asset allocation using broadly diversified mutual funds/ETF’s
cost effective implementation (lower expense ratios)
portfolio rebalancing
behavioral coaching
strategic asset location
spending strategy (withdrawal order)
total return vs income investing
For some investors, the value of working with a financial advisor is peace of mind. The Vanguard Advisor Alpha study highlights that some of the best opportunities for an advisor to add value to a client’s financial situation (and to help them avoid mistakes) is during periods of market duress or euphoria when investors may be tempted to abandon their well-thought-out investment plans that they made during calmer times.
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Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.