The 7 Habits of Highly Defective Investors

July 23, 2006

The title of this post was inspired by Stephen Covey’s best-seller The 7 Habits of Highly Effective People.

Just as there are good habits for successful investing, there are bad habits that can limit investing success. Here’s my 7 Habits of Highly Defective Investors:

1. They don’t have an asset allocation plan

We’re all familiar with the common wisdom that says that 90% of a portfolio’s performance is determined by the portfolio’s allocation. I don’t know if that is true or not, but the fact remains that having an asset allocation plan and sticking with it through rebalancing, makes a lot of sense. Why? Because it brings discipline to the investing process. When a portfolio has an asset class that performs extremely well compared to the other asset classes in the portfolio, human nature tells us to the sell the poorer-performing asset classes and buy MORE of the asset class that just performed well. In reality, we probably should do the opposite and sell some of the appreciated asset class and buy more of the underperforming asset classes.

2. They invest for the short term, using long-term investments

Stocks, a long-term investment, should only be used for goals that are more than 5 years away. Although it may be tempting to meet a short-term goal with a hot stock, it is never wise to do so.

3. They check their portfolio’s value too often

The reason this is a bad habit is that constantly thinking about one’s portfolio tends to give the portfolio a short-term feel, which can lead to short-term decision-making.

4. They get stock advice at cocktail parties

Although it might be fun to trade hot stock tales at parties, it can be hazzardous to a portfolio unless the tip is followed-up with lots of research.

5. They are envious of other’s successes

This ties in with the last point. Listening to a person brag about their 60% return can make anyone envious. However, keep in mind that they probably are leaving out some important details such as the fact that all their other stocks are in the toilet. In other words, congratulate them and change the subject.

6. They watch too much CNBC

I’m not saying CNBC is a bad thing. However, I am saying that too much CNBC can turn a long-term investor into a short-term trader. Consider changing the channel or cutting back on the business news.

7. They pay TOO MUCH in fees

I cannot stress enough the importance of keeping costs down when investing. For the most part, the more an investor spends in fees, the less they will have at retirement. An example:

All else being equal…

Investor A invests $5,000 per year and gets a 9% return after fees. In 30 years, her portfolio will be worth approximately $681,538.

Investor B invests $5,000 per year and gets an 8% return after fees. In 30 years, his portfolio will be worth approximately$566,416 or $115,122 less than Investor A’s portfolio.

Fees do matter.

I’m sure there are more bad investing habits. These were just a few that I came up with.

6 responses to The 7 Habits of Highly Defective Investors

  1. Couldn’t agree more. Just this weekend I was talking to a relative who was bragging that he just converted all his 401K invmts to cash out of concern over the escalating Middle-East conflict. Another relative, listening to this genius decided to think about doing the same thing. Did I try to talk him out of it – Yes of course! But, after awhile, you’re really just wasting your breath. Scary to think how many people out there probably apply the same logic they use to gamble to managing their retirement savings.

  2. Great advice! Nicely distilled.

  3. I would add falling in love with a stock. It’s good to remind oneself that gains aren’t realized until you sell.

  4. Reminds me of the “Dilbert” calendar: “7 Years of Highly Defective People”

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