Even more rookie mistakes that seasoned investors make

By Neville Joanes

(Sponsor Content)

Even though we all “knew it was coming” the precise timing of the market correction this month caught quite a few seasoned investors by surprise. Hey, it happens. No one can predict where the stocks go all the time. But how did you respond? Did you sell along with the herd — and lock in your losses? Or did you see this as a buying opportunity? How were you prepared for it in the first place?

Even the most experienced investors can get caught short in times like these. Recognize your investing biases that can lead to bad decision-making — and learn from them. Here are a few more that we didn’t cover last time. (See 3 rookie mistakes that seasoned investors still make.)

Confusing the familiar with the safe

Disney, Coca Cola and Starbucks are big brands. But are they safe, or even good investments — by virtue of their size?

Just a few years ago, you might have gotten the same feeling of rock-solid reliability about Nortel, Blockbuster or Kodak. Or Sears. Pan Am airlines. Netscape. Pets.com Or hundreds of other companies with billions in their war chests …  that aren’t even around today. By last year, just 60 companies remained from the original Fortune 500 list.

Investors have inherited the illusion of stability and power from size, possibly from our origins in hunting wooly mammoths with wooden spears. The big guys are hard to take down (we think). So even experienced investors will throw their money at blue-chip stocks and other institutional-style investments. It’s a half-baked hedging strategy.

When you have this bias, you don’t do the proper due diligence you would with other investments. Why look too closely, when the trading megafauna like Amazon or Apple just keep bounding onward and upward? Because the bigger they are, the harder they fall.

A big-name brand is not necessarily a bad bet. This is where a strategy of diversification comes in. By planting seeds in a range of investments instead of a single big-name brand, you’re in safer territory.

Preferring buzz to analysis

“Its growth is incredible. The ride sharing app is on track to make $2 billion in revenue this year. Its valuation has surged 400% over the last year to $18 billion …” That was the investor-targeted buzz about Uber in 2014.Indeed, until recently, it was still fashionable for any company dreaming of high-growth to say “we’re the Uber of (whatever)” in their elevator pitch.

That buzz masked problems that investors might have noticed earlier. But the buzz or the excitement generated around the story were more important than the details of the story itself. We see this kind of thing playing out even more dramatically with cryptocurrencies, with investors rushing to invest in ponzi schemes.

Instead of looking at what’s hot or what’s grabbing headlines this week, investors just need to knuckle down and do some analysis — or get an adviser to do it for them.

Start by drilling down into your own personal finance situation. How much can you put away? What are your goals? What’s your timeline? Look closely at what the investment offers in terms of risk and reward.

If you’re planning on retiring soon, you may want to invest in something that gives you a higher degree of diversification beyond equities, such as real estate, high-yield bonds, REITS or other assets. In-depth research takes time, but investing on buzz can cost you — so it’s well worth it.

Focusing on returns while ignoring the fees

This is a serious and kind of surprising blind spot for a lot of investors. Serious, because of the impact fees can have over the long term, running into many thousands of dollars. Surprising, because the problem with this bias is so obvious that investors ought to be able to avoid it.

For instance, a 2.2 per cent fee for a mutual fund might seem well worth it in a year where an investment earns a double-digit return. Much less so, when it earns 5 per cent, or even suffers a loss. It’s like trying to fill a bucket with a hole in the bottom.

That said, the bias is actually easy to understand. Many investors have trouble comparing apples to apples in terms of the management they’re getting, or the asset class they’re invested in.

Aside from the differing levels of service you get with the fees, there can be differences in the fees, themselves. They all charge an MER, but there may be additional management fees beyond that.

Markets move up and down, but the downside is partly under your control. Make sure you understand all of the fees associated with an investment, so you can get the most out of your money.

Every investor indulges in some or all of these biases. if it’s a problem for you, consider working with a financial adviser who can help you avoid them, to earn a better return.

Neville Joanes is the Chief Investment Officer of WealthBar, a robo-adviser. WealthBar provides unlimited financial planning with low-fee ETF portfolios and actively managed Private Investment Portfolios. Through their financial advisers, easy-to-use online dashboard and financial tools, they make investing more accessible to all Canadians. For the previous blog in this series, click here.