The Asquith Group Asia, Tokyo Japan on the Deadly Dozen: Investment Pitfalls to Avoid (Part 2) Edit Title

Deadly Mistake #7: Trusting “Experts” Too Much

Every other person has an adverse interest in relation to your wealth. Only you and you alone have no adverse claim on your wealth. Financial institutions handle your money in order to make some money over it. Likewise, investment counselors sell financial products to earn commissions.

In like manner, the investment publications aim to increase advertising and subscription returns; leading them to observe slanted editorial practices that focus on sensational news rather than substantial information.

In short, you derive financial recommendations from purveyors whose goals serve their own interests rather than your interests.

Never trust your wealth to the experts. The best policy is to assume that the financial advice you get is meant to favor someone else other than you.

Here is Laurence J. Peter’s definition of a true economist: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”

To prove the fact that bias always rears its ugly head, just see how the advisor’s bank book is enhanced. Understand the truth that their own view constricts what they see. Everyone has some kind of bias – including you and me.

Having said that, a lot of good people earnestly seek to find the best perspective based on their limited understanding and irreconcilable information arising from the financial industry.

Majority of so-called “experts” are as equally confounded by investing as you; and though they appear very confident, they are actually turning a blind eye to the universal wisdom that investing is essentially throwing precious money into the unforeseeable future, hoping it will return to you carrying greater value. Yet returns will almost always be like that – unpredictable as the wind. Even the experts are subject to the caprices of real events.

Hence, do not make the mistake of taking professional views as facts simply because they bear the appearance of truth or bring with them the authority of a large institution. The fact is, majority of professional advisors were schooled in particular views of discipline and rarely go beyond their scope of learning.

No single financial truth exists in the world and anyone who comes along with such a claim contradicts himself or herself.

Remember, many forms and sizes of the complex investment truth exist which so-called experts cannot completely grasp or resolve into one simple truth. A healthy skepticism toward claims of these “experts” is what you need to attain consistent returns to your investments.

Deadly Mistake #8: Not Avoiding of Low Liquidity

A liquid investment refers to an investment you can easily convert into cash, while an illiquid investment is one which has constraints to being turned into cash. For instance, U.S. Government Bonds and stocks from large, listed firms are considered liquid; and partnership interests, most real estate investments and thinly-traded stocks are illiquid.

From experience, an ordinary investor’s primary losses or financial misses will have been substantially due to loss of liquidity. Simply put, the best weapon you can have against investment losses is liquidity, whereas limited liquidity can trap your investment and lead to irrecoverable levels of losses.

Unless your strategy is to justify acceptance greater risk in order to obtain a potentially large gain, do not commit your investment into a condition of low liquidity. You can do this approach, especially if you put up other means of controlling the risk of loss for your investment.

Deadly Mistake #9: Not Seeking a Balance between Conservatism and Risk-Taking

Investing is basically a balancing act between risk and reward; and the more you learn how to handle risk control, the greater you potential for financial growth. Soaring high with tech-stock or new-issue investments and flying low with U.S. Treasury, bonds and C.D.’s alone are two extremes of investing you need to avoid. Aim for a healthy balance to maximize your opportunities to attain long-term wealth.

While a ship is said to be useless if it remains idle on the dock and not sailing, it will also be senseless if it sails to sea during a terribly dangerous storm. Go ahead and invest daringly if the reward justifies the risk and hold your punches in if you see that the risks warrant staying in the harbor.

Provide an escape route for each investment in order to safeguard your money when the weather turns for the worse.

Deadly Mistake #10: Mistaking Brains for a Bull Market

When the tide rises, all boats rise as well. But when the tide goes out, you can tell which ones remain on dry ground.

People commit the grievous mistake of thinking that a few good hits acquired through good fortune portends a bull market. As the old English proverb says, “A smooth sea never made a skilled mariner.” Acquiring the real skills of a good investor demands more than mere beginner’s luck; you need to learn how to conserve capital and how to grow during the difficult times.

You have to be a tried-and-true investor to possess the discipline to manage risk while minimizing your losses. Many people can easily confuse the falsely-interpreted results of one-way markets as the harbinger of a bull market for a whole market cycle.

Deadly Mistake #11: Confusing Total Revenue with Value Added

Often, investors make the mistake of gaging investment results based exclusively on the amount of money they made. And that is due to the fact that total return results from the interplay of market return, management skill and strategy return. Not appreciating this fact can lead to wrong conclusions.

Value-added return is the true determinant of investment skill; and that is measured by comparing total returns with a proper benchmark index for a complete economic cycle. Through this, you separate management skill from market return and strategy or style.

For instance, a growth stock manager attaining a yearly compound returns of 25% could be a failure or a celebrity based on whether the benchmark growth stock index netted 32% (7% loss of value) or lost 3% (28% added to value) for the same duration.

The converse may apply as well: Your style or strategy of investing could be innately bull-friendly with regard to where you gain in growing markets but lose terribly in declining markets.

Overall performance for the entire market cycle in relation to a suitable yardstick determines value added and investment skill.

Deadly Mistake #12: Focusing Only on Taxes or Expenses

John Maynard Keynes said it bitingly, thus: “The avoidance of taxes is the only intellectual pursuit that carries any reward.”

Sadly, many people make the error of never selling an investment due to their desire to avoid to pay taxes or fees. The converse is true as well: You should never ignore the arising tax.

Taxes and fees comprise only a single factor (transaction costs) you have to face when evaluating how a deal will affect total portfolio performance. You also have to consider other things more important than taxes and expenses, such as asset allocation, risk control, assumed returns and many more.

Investor’s goal is to enhance returns for all risk tolerance levels; and taxes and fees are just one of the components in the whole process. Whether you need to pay taxes or fees in a transaction will be based on how it will affect the total investment performance taxes and fees.

To give an actual case, most people thought it crazy to sell an entire investment portfolio in real estate in 2006 while paying a burdensome tax fee on the returns. But in 2009, they realized that the taxes spent were well worth it considering the pains and losses that were prevented.

Trying to oversimplify the decision-making process merely looking at only a single factor (transaction expenses) could lead to costly mistakes. The key to success in this case is balance.

Additional Deadly Mistake #13: Looking at Investing as not Being Fun

Investing without fun is like going to a vacation while counting costs every step of the way and forgetting to enjoy the journey. It is a lifetime endeavor you will carry and endure to the end, so it is necessary to find ways to make the most of the experience.

Investing can be a burden to a lot of people. They dislike the work of crunching numbers, the confusing terms and processes and the worrying over losing capital. This results into a lackadaisical investing experience.

If we look as investing as a virtual treasure hunt, which it really is, or as a game of Monopoly, which it simulates, you have the advantage of making the rules yourself and nobody else questioning your decisions. It is both an intellectually exhilarating experience and a potentially profitable opportunity in terms of personal growth and satisfaction.

“We struggle with the complexities and avoid the simplicities,” observed Norman Vincent Peale of the ironies of life.

Both attitudes can be beneficial, depending on how you use them. However, one can bring you closer to financial security faster than the other. Choose between having fun and getting frustrated.

Summary

You have seen some valuable steps to avoid falling into the painful and expensive traps along the road to financial success. Growing your money wisely can be both enjoyable and meaningful, while losing it blindly can be both painful and tragic.

Applying these steps can spell the difference between financial security wealth and destitution. Avoiding the costly mistakes alone can already bring you both savings and benefits.

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