The 3 Biggest Mistakes Investors Make
08/03/2011 2:30 pm EST
Investors today are too overwhelmed by instant information that they don’t fully understand much more important concepts like risk and diversification, Bill Bachrach says in an exclusive interview with MoneyShow.com.
Bill, you were a financial planner for a long time, you now train financial planners. You must have seen every kind of mistake people have ever made. People seem to have made all those mistakes in the last two years or so. Can you tell us what you see as maybe the biggest mistakes that you’ve seen investors make?
It seems that the biggest thing is getting distracted by all the noise and information. It’s a great time to be alive to have access to all this information, but the question is what does it really do for you? Is it creating confusion and inaction, or is it really helping you create a long-term game plan that you stick with over time?
I think having a short-term focus versus a long-term focus is definitely a big mistake.
How about people’s understanding of risk? I mean people seem to don’t really quite know what risk is, or they don’t know until it hits them right in the face.
That’s a huge point. It’s also the risk of just focusing on investments.
There are a lot of investors out there who are focused on getting a better return and maybe sacrificing some risk for that. But what about the rest of your financial house, there’s so much more to getting your entire financial house in perfect order and keeping it that way than just investments.
I find it interesting that people will be chasing another 1% or 2% out of their portfolio and not even realize that their liability insurance isn’t adequate, and the next time they have a party they could lose everything if somebody slips and falls. So there are all kinds of risks that are involved in getting your financial house in order beyond just the investment part.
You say they work in the financial industry and they own a lot of financial stocks or something like that. Double kind of risk there.
Absolutely. They fall in love with something, or the individual investor who thinks they’re diversified because they have three or four different mutual funds, only to find out that those mutual funds are holding basically the same securities underneath. So that’s also a huge mistake.
We’ve seen, especially in the last few years, we’ve seen a question of so many asset classes being correlated during the crisis. The only assets classes that moved opposite, moved up were bonds and treasuries and the dollar. Everything else moved down and they were supposed to be diversified by having things spread out. Have we found that diversification doesn’t really provide the kind of benefits that it use to?
Well, I think diversification is still a really good idea, but maybe some of the thinking about that and some of the specifics are not completely understood.
I saw a story recently about…I think it was 67% of the subscribers to The Wall Street Journal didn’t understand the correlation between when interest rates go up and bond values go down. So there are just a lot of people out there who don’t know what they don’t know. I think that is a huge mistake as well.
Sometimes thinking you understand how something works, and the truth is you really don’t, and so diversification can be a little more complicated than people realize.
So don’t be afraid to ask questions from people who really know something.
Boy that’s huge. I mean the solutions are often obvious once you get the questions right, but you have to know the questions.