Three Investment Mistakes

From Vanguard.com.  {Excerpt with my highlights}.

People don’t often share their investment mistakes. .....Yet, investment errors are fairly common. They’re not all catastrophic, and many can be easily remedied. Nonetheless, there are lots of them. In fact, the top-of-mind list is longer than one blog post will allow. So, let’s consider this the first in a series dedicated to common portfolio pitfalls.....

The perils of benign neglect

I know you don’t mean to ignore your portfolio, but life happens. I understand. And I don’t judge..... Fast-forward a decade or more, and suddenly you realize you’re holding a bunch of “stuff” that no longer reflects your financial goals. It happens to the best of us, but you’re relying on that collection of stuff to get you comfortably through retirement!

If you have the time and discipline, sort through your various holdings with the goal of creating a portfolio that reflects your current investment risk tolerance and time horizon. These two factors can be a starting point for setting proper asset allocation. .... If you need a lot of help, consider hiring an advisor. You’ll pay for the professional assistance, but it might be worth it to get your portfolio back on track.

The danger of the single security

If any one security (or sector) represents a relatively large portion of your portfolio, you’re susceptible to concentration risk. In simple terms, your portfolio’s performance may rely too heavily on the market movements of that single stock or sector. To varying degrees, this can introduce more volatility than necessary to your portfolio.

The wisdom of holding a broadly diversified portfolio is fairly well documented.¹ Despite this, we consistently observe that even savvy investors don’t always construct their portfolios based on research findings. Instead, investment decisions are sometimes driven by emotion and complicated by the ties that bind us to the things and people we love.....

The downside of keeping money under your mattress

...{T}here are actually two kinds of market timers: The kind that I just described and what I’ll call the “unintentional” market timer. This investor isn’t interested in complex tactical asset allocation strategies —they’re interested in protecting their nest egg. And maybe they’re a little bit guilty of the benign neglect I described earlier, unwittingly holding a more aggressive portfolio than their situation warrants. In truth, these investors are more conservative than their heavy equity allocations would imply.

Extended periods of high market volatility and uncertainty can send these investors running for the exits, seeking refuge in cash rather than suffering the market’s gyrations. If this sounds like you, you’re not alone. No one likes to admit that they missed the market rebound that inevitably follows a big downturn, but plenty of investors did. In fact, some are still waiting for the “right time” to get back into the market. But, stuffing cash in your mattress (or in your low-interest savings account) introduces shortfall risk to your portfolio. If your holdings are too conservative for your time horizon, you run the risk of losing pace with inflation and outliving your assets.

To combat this risk, you’ll need to reinvest in the equity market at the level and pace that’s right for you, consistent with your goals and time horizon. Our research indicates that it’s generally best to bite the bullet and get back to your desired allocation quickly.⁴ This “lump sum” investing approach allows your portfolio to begin working for you at the proper asset allocation as soon as possible. But if jumping back into the market has you feeling just as skittish as when you jumped out, then take your time. A traditional dollar-cost averaging approach, in which you rebalance back into equities in smaller increments each month or quarter, may make you more comfortable. Regardless of your approach, the goal is simply to get back to your desired asset allocation…the sooner, the better.

Link:  Investment Mistakes Your Neighbors Won't Tell You About.