The single most important risk to a portfolio of investments is a poorly defined or constantly changing strategy. You must have a long-term approach to which you adhere over time regardless of the current favor of the particular strategy. You will need to resist the psychological pressures of investing:
Consider these “seven deadly sins of investing”:
- //gluttony//– hoarding cash when you should invest or evaluating by only one category when you should look at the big picture;
- //greed//– looking for big winnings when time and patience pay off;
- //pride//– not selling your losers or old, familiar holdings when a new idea is better;
- //lust//– listening to the information barrage and adjusting your portfolio constantly rather than filtering it out to stick with a plan;
- //envy//– chasing fads or looking at a friend who has “winners”, making investing look more like gambling, when actually you should sell your best and buy trailing but good positions (as in the “dogs of the Dow” technique);
- //anger//– not forgiving yourself for mistakes and moving on; and
- //sloth//– changing beliefs to fit your decisions or portfolio rather than applying the lesson that you should review a portfolio intellectually and objectively and decide if you would still buy the holdings today.
You should review your asset allocation at least annually. A stock market rise will leave you over-weighted in stocks, meaning that you should sell out of stocks and buy into bonds and cash to maintain the allocation. If the stock market goes down, you should do the reverse. In fact, you should sell from your better mutual fund managers and buy the managers that have not done as well recently because those excelling and those lagging are both likely to return to the mean over time. Reallocating may seem wrong, especially when bond yields are low and CD rates are low. Nonetheless, history tells us to override the psychological urges, take “profits” from those currently doing well, and re-deploy them with assets that are more likely to provide future returns.
Adhering to a sensible investment strategy is how money is made over time. You may feel that you missed out compared to someone who is all in the right stocks now. However, you will also be glad to miss out when that person’s holdings go down faster than the market and you have non-stock investments that increase in value. Also, when there is a new influx of capital, you need to have a strategy so you can sensibly filter the barrage of information from people wanting to help you handle you finances.