BY FAZAAD BACCHUS
All investments carry with them a certain amount of risk and every investor would like to beat the risk free rate of return. Many an investor believes that this is something that he can do and many venture into it. But let me ask you a simple question, have you tried opening your front door on a normal day, of course you have, every day! Let’s change the environment, there is a dog chasing you and you are trying to open the front door, suddenly the keys don’t fit, they don’t work, they don’t turn etc! You get the point?
When you are thinking of an investment, you tend to have all the answers because you are looking at it from the outside and therefore the pressure of making mistakes is absent. When your money is in play things suddenly look different, fear of loss becomes real and that’s the time when you need a good captain to weather you through rough waters. And have we been having some rough waters this past year!
So to avoid that pit fall feeling deep in his stomach, the individual plays it cautiously and makes his first mistake as he begins to invest too conservatively. He goes hard for the bond market or a GIC because it’s a low risk investment but therein lies the problem, low risk is equal to low return and over time a loss of return. Opportunity cost for his money is lost.
Secondly when you are investing on your own, you are trying out the market, you are not holding hands with a financial advisor or a qualified professional and so when things go a little awry the typical investor pulls out or stops regular investing much to his detriment. The typical investor reacts to the news about the market and if the TSX drops or the statement comes in at a lower value, the first thought is to cash out, this can be a costly mistake.
Thirdly, the typical investor tends to buy what’s been doing well, they are actually following the crowd and that may dangerous as the returns that they are hoping to achieve may have already been paid out. He is actually buying a fund or investment on its way out and doesn’t know it.
Fourthly, the typical investor employs hope as a strategy. Hope is not a strategy! When a fund is falling or positioned to rise, the typical investor learns about it too late creating a lag and loss in revenue. If his investment falls, he hopes that it will recover but doesn’t have the fundamentals to know if it will.
Fifth, when you have grown accustomed to your Fund and you are so familiar with it that you refuse to invest elsewhere. For example many investors were in the Canadian monthly income fund last year and even though the Canadian market fell, they refused to consider their options obviously to their loss. Diversification is the key in investments, didn’t your primary school teacher teach you not to put all your eggs in one basket, because if it falls all the eggs will break, well that’s the meaning of diversification.
We are not smarter than the market and we don’t control it, not the investor or the advisor. It’s like the ocean, we do not control the waves or rough seas, but at the helm you should have a good captain to guide you safely through. That’s a good financial advisor at work for you; therefore avoid the biggest mistake by finding a good financial advisor.
