Dear Lara,

I've noticed that, in recent years, my investing "strategy" has actually been motivated by fear. As a result, I've made hasty decisions triggered by negative news reports, and I have been guilty of buying high and selling low even though I know a buy-and-hold strategy would be more successful. I feel like a walking example of "common investing errors." Can you tell me about other common investing mistakes so that I don't make them?

Sincerely,
Emotional Investor

Dear Emotional,

While we can learn much about successful investing by studying the best investors, it can also help to learn from our mistakes. The Chartered Financial Analyst (CFA) Institute has identified 20 of the most common investing mistakes (including the ones mentioned above). Here are four of them that I would like to emphasize:

1) Having unrealistic return expectations

Investors tend to have higher expectations than those who manage money professionally. One study revealed that Canadian investors expect an average annual return of 10.6% on investments, whereas financial professionals anticipate 6.5%, leading to one of the highest expectation gaps in the world.

2) Lack of clear investment goals

Some investors become too focused on short-term returns or the latest fad. A recent study in the U.K. stated that less than one-third of investors had any specific long-term goal in mind when investing. However, even a modest investing program can yield significant dividends down the road. Investing just $20 per day at an average annual return of 6% would yield more than $1.2 million in 40 years.

3) Failure to diversify

Having too much exposure to a single security or sector comes with risks. Diversification is intended to protect you from downturns that may affect sectors at different times, while also providing access to the best performers.

4) Excessive trading

Investing often involves patience to endure down-market times. Timing the markets is difficult, if not impossible. Even if you were to exit the markets before a downturn, you'd need to reenter before the markets resumed their upward climb. This often happens with little warning.

As an advisor, I do my best to prepare clients by putting a plan in place to set priorities and using a disciplined approach that emphasizes asset allocation, strategic diversification, risk management and a focus on quality to guide us through the different cycles.

Advisors can also choose to integrate different techniques to reduce impulsive decision-making, as many investing errors result from succumbing to our behavioural biases. This may include regularly rebalancing portfolios, using managed products to put buy/sell decisions in the hands of experts, or incorporating systematic investing programs like dollar-cost averaging or dividend-reinvestment programs.

Professional advisors are here to help keep you on course, and to limit the impact of investment errors as we chart the path to longer-term success.

About Lara Austin
Lara Austin is a Portfolio Manager and Wealth Advisor for RBC Dominion Securities in the Comox Valley. She believes that financial literacy along with transparency, trust, and diligence to detail is a cornerstone of successful client relationships.

For further information about this topic, she can be reached at lara.austin@rbc.com or at 250-334-5606.