A Brief Warning, My Friends

When it comes to the hot new sparkly thing on the horizon; beware. Never underestimate the all-too-human instinct to believe anything we want. There are deadly investing sins that clients can make. Here are 7:

1) Buying high and sellling low. Investor irrationality, or human irrationality for that matter, is predictable, even though the markets may not be. We cannot time the market. It astounds me that this mantra is repeated over and over again in writing and in lectures. However, every time we turn on the television, every lecture I attend, and many texts we read, and every casual conversation about money - experts are doing exactly that - trying to predict the future.

2) Ignoring math in favor of reaching for something called Alpha. the 'I want more' syndrome. Nobel Laureate, William Sharpe, stated that after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar.

3) Shiny objects. Insects have an instinct to fly toward light, where they often meet their demise. Some hedge fund managers may be brilliant, or at least articulate brilliantly, but, my friends, brilliance does not translate into forecasting the future nor translate to profitable returns.

4) Confusing knowledge with unique knowledge. Keep this in mind: If you follow the herd advice on television, you may well be just another lemming following the rest over the cliff.

5) Turning a blind eye to common sense. Do not believe everything you hear. When a financial planner states there is no downside; only upside - take a deep breath. On the face of it, this doesn't make sense. I was once told by a financial planner that his fee was 1.6% of assets under management and he added that he could control, lower, the expense ratios of any of the mutual funds he would invest on my behalf. When I repeatedly pushed him to explain this to me, he grew frustrated and hung up on me.

6) Creating unnecessary complexity. This is a big one. You can actually own thirty different funds with high expense ratios and still not be diversified! Unnecessary complexity typically leads to under performance.

7) Confusing speculative investing with investing. Think before you leap into speculative investments such as crypto, gold, futures. If you need dividends, cash to live on, increased earnings, then invest in a well-researched stock or a mutual fund.