4 More Investing Mistakes to Avoid
Wealth Building Tips to Help Your Portfolio Grow
The key to building wealth lies not in making brilliant allocation
decisions, but rather in avoiding large mistakes. These four
additional investing mistakes are among the most common committed
every day. This article is a sequel to Four Investing Mistakes to
Avoid: Becoming Your Portfolio's Worst Enemy.
1. Overpaying for InvestmentsThe price you pay for an investment is
the absolute determinant of your return. An investor should never ask,
is company XYZ a good investment. Instead, he should ask, is company
XYZ a good investment at this price .
2. Overpaying for Investment ServicesUnless there is a legitimate
reason you require a full-service broker, you should opt for a
significantly less expensive discount broker such as Charles Schwab,
E-Trade, Ameritrade or Brown & Co.
The commissions on trades at these types of discount brokers can
amount to less than one-fourth the amount you would be charged at a
full-service firm. Thanks to the time value of money, an investor can
save hundreds of thousands of dollars over the course of his lifetime.
3. Extrapolating Current-Year Earnings into Future Periods to
Determine ValueBenjamin Graham warned that the hindrance to successful
investing did not lie so much in overpaying for good companies (which
is a very real performance-damper nonetheless), but rather in
overpaying for mediocre companies based on current year earnings that
may be the result of a booming economy or a cyclical upswing. To guard
against this pit fall, he recommended using average earnings.
4. Discounting Index FundsOnly a small, minute percentage of
professional money managers have been able to beat the S&P 500 or the
Dow Jones Industrial Average consistently over the course of many,
many years. Despite relatively high compensation, extremely bright
individuals and rooms full of math whizzes performing market analysis,
the dumb, unmanaged portfolios of the S&P and Dow manage to trounce
the competition nearly every time.
Investors who are privy to this information and have no ambition to
become a master at security or financial statement analysis would be
well served to set up a dollar-cost averaging plan into a low-cost
index fund such as Vanguard over the span of a decade or more. Judging
by past statistical evidence, this investor will most likely trounce a
significant majority of his competitors. Wealth building aside, the
index investor is also free to ignore short-term market gyrations,
portfolio reallocations and individual investing decisions freeing up
a significant amount of time for the things that really matter.
