10 mistakes investors in asset allocation strategy
In the previous article we discussed the principles of the investment portfolio and its imbalance in accordance with the rules of asset allocation as tells us the book of Jerry Mikolisa and DorianaÏåðó÷÷è «Asset allocation for dummies». This time, again using material of the same book, find out what errors committed by investors at realization of Asset allocation and profitable strategy.
1. Ignoring the principles of asset allocation. Portfolio investments and asset allocation give the opportunity to the majority of investors to achieve good results. Moreover, it is a key component of a successful strategy. Why do the vast majority of not follow these guidelines or makes mistakes?
There is an almost universal explanation of this: most of the investors, in fact, inherently are not investors, and speculators. They find very interesting to search for hidden investment opportunities, and think they will get a great profit using market-timing or other equally unreliable strategy. On the other hand, passive portfolio investments for many fairly boring, and people do not like to be bored. Don't make the mistake of ignoring asset allocation as a basis for your investment strategy!
2. Diversification of assets is not enough. Investors often confuse the distribution of assets (asset allocation) with diversification. An example of this can serve as a portfolio, which consists of the shares of oil companies and «raw materials» of investment funds. Such a portfolio, of course, will be diversified, but on the other hand is extremely unsuccessful in terms of asset allocation, as it will heavily depend on oil prices.
Diversification is one of the important steps in the distribution of assets, but it is only a step. Àsset allocation goes beyond simple diversification and requires the choice of classes of assets, which have a weak correlation with each other. These assets should be mixed in the portfolio in the correct proportions to improve the risk/return the total portfolio. Only after that again starts to play the role of diversification - to distribute the assets within each class properly.
3. Forget about rebalancing. Portfolios as cars. If you want to have a car for a long time have served you faithfully, do not forget to perform regular maintenance. It is the same with portfolios, and the most important aspect of the regular servicing of the portfolio - ðáàëàíñèðîâêà. Necessary ðåáàëàíñèðîâêà at the right time - it is a guarantee of receipt of the return, which potentially can give your portfolio. By itself ðåáàëàíñèðîâêà, as a key component of the strategy àsset allocation, often inconvenience for beginners, forcing to sell assets, which rose in price and buy the, price of which on the contrary decreased, i.e. do exactly the opposite of what they are friends of friends and recommend to the media.
4. Not yet formed a long-term investment plan. You must be a solid long-term investment plan (the plan of distribution of the assets), because without it you're going to fail. To plan, you must perform several actions:
- think about the long-term goals, the sources of revenues and expenditures for the next 10, 20, 30 years;
- to determine the personal tolerance for risk;
- to deal with the different classes and subclasses of the assets and their behavior;
- decide which part of the portfolio will be invested in each of the classes and subclasses of assets;
- understand how to monitor the yield of the portfolio and with that she is compared;
- document the investment plan.
In the future, it is necessary to adhere to the established plan.
Work on the implementation of all of the items listed above can be quite tedious. However, if you take the time and do it, then at the end to get the perfect profitable investment plan. And no objections, only such work can guarantee you a profit in the years ahead!
5. Financial management under the influence of emotions. If you do not have a sound long-term investment plan, the fear and greed will fill all of your thoughts. In the event of the fall of the stock market you can panic and sell all your assets (most likely at a loss), and will be content with a role of the observer until't find a safe again to return to the market (most likely it is already too late). You can rarely luck, but in the long term, you will not be able to count on a decent result. Don't let your emotions guide you!
6. Too much attention to the financial mass media. If you are serious about investing, the reading and viewing of the financial news can be useful, but not 24 hours a day and 7 days a week. The investor it is important to understand what is happening to the U.S. economy and the global economy, as this may have an impact on the overall distribution of assets in the portfolio depending on the phase of the business cycle, and some of the «adaption» under it. But view current news should not be the cause of sudden and radical change your investment strategy. Truly significant economic events unfold gradually. Do not follow the investment recommendations, which are given in the financial mass media! Watch the news just to be aware of the General economic trend.
7. The chase for the last profitability of the funds. At the bottom of advertising leaflets of the funds of the small font is usually write that «the Past yield does not guarantee future results.» Nevertheless, investors ignore this warning and entrust their money funds, sectors or managers who have beaten the market. The chase for yield is similar to riding in a car ahead, but looking in the rearview mirror. Not a fan of the purchase of the most «hot» funds or sectors, and stick to your long-term investment plan.
8. An attempt to «beat the market». Active management are usually claim to know in what shares it is necessary to invest and when to do it, to «beat the market». Let's just say, this is nonsense. Research shows that such strategy lose indices in the case of long-term investment. Short-term exceptions from this rule are typically the result of luck. The only way to get a yield higher than the market in the long run is the approach of asset allocation with diligent rebalancing and the use of low-cost index passive funds.
9. Ignoring taxes. This error is related to the placement of funds in assets that generate high taxable income, in brokerage accounts without concessions on taxes. All this refers exclusively to residents of the United States.
10. Neglect of inflation. Do not forget about inflation, when are your long-term investment plan. Define their wealth only by its real purchasing power. As the real purchasing power of the dollar (and the ruble) is decreasing, then create a portfolio in such a way (based on your tolerance for risk)to make it in the long run produce income above the inflation rate.
