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Mistakes investors make

Updated on August 6, 2015

The root of bad investing is emotion

I was sitting at my desk a few years ago (2003) and a co worker shouted over the glass “What is the best mutual fund?” I replied I like the Gabelli Asset fund. He shouted over the glass “I don’t see it.” I got up from my desk and walked over to his office and discovered he was looking at our company 401K plan. I told him the best fund in the plan was probably the Fidelity Contra Fund. Upon further investigation I found he had been in a meeting and was convinced the company was going to go bankrupt and he needed to sell his company stock and move it to a mutual fund. He had his entire 401K in company stock and Enron had just gone down. Looking back we worked for General motors which went broke only a few years later. I began to teach about the concept of asset allocation and spreading his risk when he stated he did not have time for that. I made the recommendation that he put his money in a target retirement fund. He was vehemently opposed to that so I recommended the total market index fund. I stated that if you are going to put all your money in one fund and you want it all in the stock market the total market index is by far the best choice. A few clicks of the mouse he moved his fortune into the total market index and ran off to another meeting. I admire this guy. He worked all of the overtime he could. His wife clipped coupons and his hair. His 401K was worth over a quarter million. Doing a great job of investing his money was not something he wanted to do. He was very wise to take his money out of General motors stock!!

Why would a man who was so conscious of money be so careless with his investing? I never asked him that but I am sure it was not logic it was emotion.

I write in my hub “How much company stock should you keep in your 401K?” about a man and his wife who kept all of their money in their employers company stock. In this case the couple was convinced that the companies they worked for were good solid companies. Time has shown these were not good choices.

Make good choices!

So what are the mistakes investors make?

Other than the examples I give above there are many. Many people like to buy a hot stock. I have seen people put their fortune into gold mining stocks, ethanol stocks, oil stocks when the price of oil was at record highs and new ventures that never panned out. I had a guy tell me he always picked the fund in his 401K which made the most on a flyer he had. The problem was the flyer was three years old and he was investing in a sector fund which invested primarily in Japan.

Back in 1999 and early 2000 I saw people buy stock mutual funds like crazy only to sell the funds a few days after 911 at a huge loss. I have seen options schemes to make big money really fast as well as huge investments in penny stocks.

Jesse Livermore who some believe was the greatest stock trader of all time realized how devastating trading on emotion can be. He hired psychologists and mathematicians to aid in his trading in the stock market.

My recommendation is to develop your own asset allocation and invest in the best funds in those asset classes. Once you have an asset allocation select the best small cap, best mid cap, large cap, bond, and even concentrated portfolio funds for their portfolio.

Regardless if you are investing in your IRA, 401K, 403B or taxable account invest your money wisely. How you invest is equally as important as how much you invest.


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