The 5 Mistakes Every Investor Makes and How to Avoid Them

Preface xi Acknowledgments xiii About the Author xv Introduction The Market Wants to Be Your Friend xvii Mistake #1 Market Timing 1 The Idiots 5 The Liars 5 Why Is It So Hard to Beat the Market? 7 The Masses Get It Wrong, Over and Over Again 8 The Media Get It Wrong, Over and Over Again 9 Economists Get It Wrong, Over and Over Again 9 Investment Managers Get It Wrong, Over and Over Again 14 Newsletters Get It Wrong, Over and Over Again 17 Your Buddy 18 Strategies That Don't Sound Like Market Timing but Are Market Timing--Oh, and They Don't Work, Either 19 What Smart Investors Have to Say on Market Timing 21 Knowing All This, Why Would Anyone Market Time? 21 Corrections 22 Bear Markets: An Overview 26 When Bear Markets "Turn," They Make People on the Sidelines Look Silly 30 The Market Is Volatile--Get Used to It 30 You Can't Wait for Consumers to Feel Good 31 Learning to Accept the Bear Markets 33 Miscalculating the Risk of Market Timing 34 But What If I Am Perfect? 35 Lump Sum Investing versus Dollar Cost Averaging 36 Learning to Fly 40 Avoiding Mistake #1--Market Timing 42 Mistake #2 Active Trading 43 The History of Active Trading 44 Active Investment Managers Lose to Indexing 45 Fisher Investments 46 Legg Mason Value 46 Jim Cramer 48 Newsletters Lose to Indexing 50 Active Mutual Funds Lose to Indexing 50 Survivor Bias (a.k.a. Mutual Funds Perform Even Worse Than the Data Suggests) 52 What About the Winners, Huh? What About the Winners?! 53 Hedge Funds Lose to Indexing 56 Endowments--Misperception of Performance 60 Venture Capital (Sounds Sexy but Usually a Dog) 62 The Taxman Commeth (a.k.a. Dear Goodness, It Gets Worse) 64 Portfolio Activity Hurts Performance 64 But Doesn't Active Management Work in a Down Market? 65 Why Indexes Win 65 S&P 500, Here I Come! 67 Avoiding Mistake #2--Active Trading 69 Mistake #3 Misunderstanding Performance and Financial Information 71 Misunderstanding #1--Judging Performance in a Vacuum 71 Misunderstanding #2--Believing the Financial Media Exists to Help You Make Smart Decisions (a.k.a. the Media Is Killing You) 73 Misunderstanding #3--Believing the Market Cares about Today 77 Misunderstanding #4--Believing an All-Time High Means the Market Is Due for a Pullback 80 Misunderstanding #5--Believing Correlation Equals Causation 83 October Is the Worst Month to Invest 84 Sell in May and Go Away 85 Misunderstanding #6--Believing Financial News Is Actionable 86 Misunderstanding #7--Believing Republicans Are Better for the Market Than Democrats 87 Misunderstanding #8--Overestimating the Impact of a Manager 89 Misunderstanding #9--Believing Market Drops Are the Time to Get Defensive 90 Avoiding Mistake #3--Misunderstanding Performance and Financial Information 91 Mistake #4 Letting Yourself Get in the Way 93 Fear, Greed, and Herding 93 The Overconfidence Effect 97 Confirmation Bias 101 Anchoring 103 Loss Aversion 105 Mental Accounting 106 Recency Bias 108 Negativity Bias 111 The Gambler 113 Avoiding Mistake #4--Letting Yourself Get in the Way 114 Mistake #5 Working with the Wrong Advisor 117 Most Advisors Will Do Far More Harm Than Good 118 Advisor Selection Issue #1--Custody 118 Advisor Selection Issue #2--Conflict 123 Advisor Selection Issue #3--Competence 129 A Final Thought on Advisors--Principles 132 Avoiding Mistake #5--Choosing the Wrong Advisor 132 Mistake #6 Getting It Right 135 Rule #1: Have a Clearly Defined Plan 135 Rule #2--Avoid Asset Classes That Diminish Results 137 Rule #3--Use Stocks and Bonds as the Core Building Blocks of Your Intelligently Constructed Portfolio 141 Putting It All Together 144 Rule #4--Take a Global Approach 145 Rule #5--Use Primarily Index-Based Positions 147 Rule #6--Don't Blow Out Your Existing Holdings 147 Rule #7--Asset Location Matters 149 Rule #8--Be Sure You Can Live with Your Allocation 150 Rule #9--Rebalance 151 Rule #10--Revisit the Plan 152 The Ultimate Rule--Don't Mess It Up! 153 Portfolio Examples 154 A Path to Success--Intelligent Portfolio Construction 158 The Ultimate Mistake 161 Conclusion Let's Roll! 165 References 167 Index 175