1. Are your investment choices the product of carefully calculated investment decisions?
   Unfortunately, many investors buy stocks based on hot tips, or simply chase stocks that have been rapidly climbing in price. The lack of a strategy can lead to very poor investment decisions. Using stock selection as an example, stock picking should be based on market anomalies and/or earnings forecasts that have yet to be priced in to the market (i.e. purchase companies with an attractive earnings outlook at cheap valuation multiples).
2. Do you remember to consider your investment time horizon and risk tolerance?
   Before making an investment you need to consider when you will need the cash that will be tied up by the asset you are purchasing. For example, if you are retiring within a couple of years you should not be heavily invested in risky assets, given that your time horizon is short which implies you would have little time to recoup losses in the event of substantial decline in the asset’s value. If you’re investment time horizon is 20-plus years, you can afford to take on more risk. However you need to ensure that your investment choices fit your risk tolerance. This includes having an understanding of what can make your investment choice a bad one and the asset’s historical price volatility.


3. So you think your portfolio is well diversified?
   Most investors are instructed by their advisers to own several investments in order to be diversified. However, owning multiple energy stocks does not constitute being well diversified. Investing across many sectors is still not enough. Investors need to invest in multiple asset classes and spread risk across several geographic regions. Ideally, before deciding on an asset mix, special attention is required to ensure that the various asset classes are not highly correlated. While this sounds like a lot of work, it is well worth it. Of course, it is easier said than done since many asset classes become highly correlated during market panics.
4. Are you buying investments when they are on sale?
   Too often investors buy stocks they like without determining if they are worth the price they pay. Might this sound like you? How would you feel if you paid $25,000 for a car that is worth $20,000? Probably not too good. The same goes for investing. Buying stocks when they are trading at a large premium to historical valuations or relative to their peers can be quite dangerous. Ideally, you find stocks with exceptional earnings potential that are trading at discounts vs. their competitors and past valuations. For more information on value investing, we recommend reading “Getting Started in Value Investing” by Charles Mizrahi.
5. Before making an investment have you figured out your exit strategy?
   If you say no, you are not alone. Failure to prepare an exit strategy puts you in a bad situation. Ideally, when you buy a stock you should have several criteria that will force you to sell it. Some of these include price targets on the up and downside. Placing stops is important since it prevents you from experiencing deep losses in the event of a market bust or that your investment strategy was off the mark. However, not all exit strategies have to be price-based. You should continually monitor your investments to ensure they remain good choices. Essentially, every time you reevaluate your portfolio you need to ask yourself would I invest in these stocks again today? If the answer is yes, then don’t sell, otherwise you know what to do!

Happy Trading

Tags: investment mistake

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