|Written by Rob Goldman|
As we approach the midyear timeframe and we focus on fun in the sun, both novice and professional investors tend to be prone to mistakes. With this concept in mind, we give you the top 5 investor mistakes.
On a related note, the low stock volumes, weird fund flows, neutral sentiment and lack of volatility in an upward trend is not the greatest mix for stock pickers. See what is really happening behind the scenes and why a return to volatility can create big returns for small cap stock pickers.
TOP 5 INVESTOR MISTAKES
As we approach the midyear timeframe and we focus on fun in the sun, both novice and professional investors tend to be prone to mistakes. With this concept in mind, we give you top 5 investor mistakes.
Putting Eggs in One Basket: I have always held to the belief that having a smaller concentration of holdings can be the most rewarding approach to equity investing. That does not mean putting all of your eggs in one basket, however. Too often individual investor portfolios are decimated by an unbalanced portfolio, whereby one position, which greatly outweighs the others, collapses. Having an unequal weighting is expected, but having one stock comprise 40-50% or more of a portfolio is incredibly risky.
Playing Rip Van Winkle: Having been involved in the investment industry as a profession for over 25 years it is hard for me to untether myself from stock quotes and news. Still, there is a large group of investors who only occasionally monitor their holdings in the hope that in a few years the value will have increased. This strategy may have been sound years ago but given the potentially large swings in stocks of all sizes, one could get burned if one does not play an active role in investment monitoring.
Forgetting that Greed is Bad: There is a saying on Wall Street: Pigs get fat but hogs get slaughtered. When a stock is on the move, our instinct is to be greedy and let it continue its ascent, rather than lock in gains. Unfortunately, more often than not, gravity sinks in and what goes up must come down. By setting a stop-loss for a portion of your holding during a stock’s rise as well as a separate one at a lower threshold in case of a stock collapse, you can save yourself a headache and capital gains.
Engaging in the Wrong Diversification: Years ago, when mutual funds were in vogue, many investment professionals were loading up their client portfolios with a series of funds that duplicated exposure, holdings and strategy to the detriment of the investor. Today, these same pros are repeating the same mistake with ETFs. For example, they may buy a European ETF and then supplement it with Germany or Spain ETFs. This over-diversification creates too much exposure to an asset class which reduces performance and can be as bad as greed.
Not Taking Responsibility: Whether you are investing the money yourself or paying someone to do it on your behalf, the buck should stop with you. It is too easy to blame advisers, companies, the market, etc. when strategies and execution fail. If you are engaged in the process beyond stock monitoring and take some responsibility for the performance, portfolio strategy errors can be limited and wealth building can improve.
Low is Bad
Yes the bull market in big stocks continues. Still, it has not been driven by large volumes as too many investors remain uncommitted. This is evidenced by the continuing high Neutral status in the weekly American Association of Individual Investors Survey (AAII). Even fund flows as measured by Lipper have not been particularly useful. Big weekly shifts in fund inflows and outflows have resulted in a paltry net inflow of $800M over the past 5 weeks. This figure is representative of the herky-jerky nature of investor sentiment as inflows have been as high as $9.7B and outflows have nearly reached the $8B mark as well.
As we noted in the Market Monitor last week, the low volatility in small stocks, as measured by the VIX is also cause for concern as it will not take stocks to the Promised Land, in our view. That volatility is needed for stock pickers to really shine. On the flip side a lack of volatility in an upward trend can make us complacent and cause losses.
Chart 1: CBOE Volatility Index YTD (VIX)
(Source: Yahoo! Finance)
Chart 2: Russell 2000 Index YTD (RUT)
(Source: Yahoo! Finance)
In this scenario, we focus on the troughs and peaks. For instance, buying the Russell 2000 at the height of volatility this year in early February got you a quick 20% return in a little over a month. Volatility is the catalyst to short term profits making the quick buck trade is definitely more difficult with the volatility so consistently low. Look for levels of the VIX consistently over 15 to signal a time to start looking into the short term trades. Have a great week!
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