80 reasons your investment performance is not as good as it should be

  1. You think investing is about picking winning stocks.
  2. You have Internet- or smartphone-induced ADHD and can’t think deeply about this topic.
  3. You equate investing with gambling.  [elaboration]
  4. You want to get rich quickly.
  5. You think others have a crystal ball and pay too much attention to their forecasts.  [elaboration]
  6. You oversimplify.
  7. You misunderstand the relationship between stock markets and the economy.
  8. You think there is a straightforward relationship between a company’s success and its stock price.
  9. You are quick to jump to conclusions.
  10. You focus too much on the short term.
  11. You don’t understand the feedback loop for measuring results.
  12. You are unduly swayed by stories.
  13. You ignore the lessons of history.
  14. You think that past performance is an accurate guide to the future.  [elaboration]
  15. You focus on the trees instead of the forest.
  16. You overemphasize the importance of yield.
  17. You don’t understand the mathematics of investing.
  18. You see patterns in random data and draw erroneous conclusions from them.
  19. You don’t understand why stocks go up and down.  [elaboration]
  20. You pay too much attention to irrelevant numbers.
  21. You confuse a decline in price with a permanent loss (and a rise in price with a permanent gain).
  22. You believe that risk can be turned up and down like the volume on your radio.
  23. You misunderstand the nature of market volatility and overvalue stability.  [elaboration]
  24. You think a rising stock market is always better than a falling stock market.
  25. You underestimate the impact of inflation.
  26. You want more certainty than is possible.
  27. You let others do the thinking and you follow their actions.
  28. You underestimate your own ability to successfully invest.
  29. You overestimate your ability to pick winning investments.
  30. You have unrealistic expectations about the market’s behavior and your own performance.
  31. You overestimate the extent of your knowledge about a particular investment.  [elaboration]
  32. You are too optimistic about the investments you make.
  33. You overvalue what you own.
  34. You spend too much time hoping and dreaming.  [elaboration]
  35. You attribute your winning investments to your own brilliance and attribute your losing investments to bad luck.
  36. You pay much more attention to information which supports your assumptions and beliefs than information that contradicts or challenges them.
  37. You are afraid to make a decision that might turn out poorly.
  38. You think too much about proceeds and not enough about process.
  39. You are scared to make fundamental changes to your investing process.
  40. Your mental model of how to invest has fundamental flaws.  [elaboration]
  41. You spend too much time and attention on items you cannot control.
  42. You focus far too much on what to buy and whether now is the right time and not nearly enough about how much to invest.  [elaboration]
  43. Your financial assets are concentrated in too few categories.
  44. You try to control risk by security selection.
  45. You think the house you own is an investment.
  46. You borrow money to invest without fully understanding the risks involved.
  47. You hold too much cash.
  48. You think that investing your money outside this country is a foreign idea.
  49. You invest in asset classes that have a negative expected return.
  50. You let your asset allocations drift.  [elaboration]
  51. You buy assets without paying attention to their value.
  52. You only buy stocks of familiar companies.
  53. You equate average with mediocre.
  54. You are too concerned about the impact of taxes.
  55. You are not concerned enough about the impact of taxes.
  56. You own too many bond investments.
  57. You own too few bond investments.  [elaboration]
  58. You are afraid to buy when markets are declining because they might go lower.
  59. You are afraid to buy when markets are rising because you fear it is too late.
  60. You take actions to avoid losses and forego large gains as a result.
  61. You don’t ever want to sell anything.
  62. You freak out and sell out at market bottoms.
  63. You wait until markets appear “safe” before buying.
  64. You trade too much.
  65. You don’t trade enough.
  66. You underestimate the costs of professional management.
  67. You overestimate the abilities of professional management.
  68. You spend too much for professional help.
  69. You don’t organize your finances.
  70. You don’t measure your progress.  [elaboration]
  71. You don’t compare your progress to a reasonable benchmark.  [elaboration]
  72. You don’t periodically rebalance your portfolio.
  73. You don’t know what to do when the market makes an unexpected move.
  74. You don’t know what to do you when your personal situation changes dramatically.
  75. You pay too much attention to the financial media.
  76. You pay too much attention to stuff that doesn’t matter.
  77. You overestimate the time required to manage your portfolio intelligently.  [elaboration]
  78. You overestimate the amount of expertise required to manage your portfolio intelligently.  [elaboration]
  79. You have no good source of unbiased, high quality, well-organized educational investment information, tailored to your knowledge level, circumstances, and learning abilities.
  80. You make investing decisions like a human.

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The importance of mental models (part two)

In the previous essay, I described the game/contest mental model for making investment decisions and detailed many of the problems that result.  The model’s inherent problems are due to how it simplifies an overwhelming choice of options in a manner that ignores too many important aspects of the investment landscape.  Let’s revisit the three critical questions and develop a better mental model. Read the rest of this entry »

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The importance of mental models (part one)

Investors face a daunting set of choices.  They can be grouped into three general categories:

  1. What to own
  2. When to buy or sell
  3. How much to invest in any single investment

What to own: There are tens of thousands of potential securities to own if you only include those available to the broad public.  Including private investments would push the total number into the millions.

When to buy or sell: Securities can be bought and sold almost continuously.  They can be held for seconds, minutes, hours, days, months, or years.

How much to invest in any single investment: One can invest any amount from a trivial amount of money to much more than their net worth by borrowing. Read the rest of this entry »

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How should a portfolio be measured?

In the previous essay, I discussed why it is imperative to measure your portfolio periodically.  In this essay, I will describe how to measure its most important characteristics.

The first principle is to measure the whole portfolio as an entire unit, and not just focus on a particular subset.  What matters is the forest, not the trees.  Read the rest of this entry »

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Why measure your portfolio?

I recently measured and reported on the results of the Cognitive Investing Demonstration Portfolio (www.cognitiveinvesting.com/demonstration-portfolio) for the second quarter of 2012.  What is the point of this exercise?  What can we learn from it?  Should you be doing something similar with your own portfolio?

The answer is a definite yes.  Many investors, however, neglect this essential task.  Some take a look at their portfolio and skimp on the process, looking only at the bottom line.  They are doing themselves a big disservice and are passing up an opportunity for improvement of their portfolio management process. Read the rest of this entry »

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Consider changing your dream

Many investors bristle when I state that most individual investors should not buy individual stocks.  I recently was told by a reader of my blog, “You have taken a lot of the fun out of investing by pointing out the problems of buying individual stocks.  Owning index funds is boring.”

I have attempted to extinguish their dream.  They dream of buying the next Apple or Amazon when the companies are small and insignificant compared to what the companies and their stock prices will become in the future.  Someone who invested $5000 in Apple stock ten years ago would now have over $300,000 worth of stock, if he or she had not sold any along the way.  The Amazon investor would have about $63,000. Read the rest of this entry »

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Are volatile markets something to be feared?

Volatility is one of the most misunderstood concepts in investing.  It is usually presented as something bad and to be avoided.  This is shortsighted, misleading, and efforts to reduce it can create more problems than solutions.  Investors should instead welcome and profit from the opportunities created by volatile markets. Read the rest of this entry »

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