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05.21.04
 By
Scott Frush
Are you as good an investor as you think? Do you consider yourself
a well-informed investor able to anticipate and avoid nearly all pitfalls
associated with investing? Chances are, you are making one of the
common errors that could cost you hundreds or even thousands of dollars,
or worse yet, your financial independence, control and security.
"I see people making the same costly mistakes over and over,"
says Scott Frush, CERTIFIED FINANCIAL PLANNER and author of Optimal
Investing: How To Protect and Grow Your Wealth With Asset Allocation
(Marshall Rand Publishing; available by calling 1-800-247-6553). "But
small leaks can sink great ships." |
Scott
Frush is president of Frush Financial Group and editor of the Journal
of Asset Allocation. Discover some of his investment secrets in the
free report, 15 Golden Rules for Building Optimal Portfolios, available
at www.AssetAllocationExpert.com.
Here Scott Frush shares eight common, yet costly, mistakes investors
make when designing their investment portfolios and reveals how to
avoid them.
1. OMITTING APPROPRIATE ASSET CLASSES AND ASSET SUBCLASSES.
Numerous landmark studies have concluded that how you allocate your
portfolio, rather than which investments you select or when you buy
or sell them, determines the majority of your investment performance
over time. As a result, make every effort to allocate your portfolio
to all appropriate asset classes and asset subclasses.
2. SELECTING INAPPROPRIATE ASSET CLASS WEIGHTINGS.
By selecting inappropriate asset class weightings a portfolio may
earn a lower return and experience greater risk than expected. Consequently,
be careful not to over or under weight any asset class, thus enhancing
your portfolio's risk and return trade-off profile.
3. UNDERESTIMATING THE IMPACT OF INFLATION.
Inflation can erode the real value of your portfolio over time, thus
placing your future financial security at risk. As a general rule,
the longer your investment time horizon, the more you should allocate
to equity investments. For shorter investment time horizons, emphasize
fixed-income and cash and equivalent investments.
4. NEGLECTING THE EFFECTS OF PORTFOLIO MANAGEMENT EXPENSES.
Over time, the compounding effect of portfolio management expenses
can be quite large, thus depriving you of better returns. For this
reason, you should focus on minimizing portfolio management expenses,
specifically trading costs, advisory fees and taxes.
5. MAKING INACCURATE RETURN FORECASTS.
Forecasting is the single most difficult task with designing portfolios.
Although not a perfect solution, using historical returns rather than
making forecasts is generally considered more appropriate for individual
investors.
6. OVERESTIMATING THE LEVEL OF PORTFOLIO DIVERSIFICATION.
Diversification is one of the ten cornerstone principles of asset
allocation and is key to reducing risk, namely company-specific risk.
To properly diversify, you should hold sufficient quantities of not-too-similar
securities with comparable risk and return trade-off profiles. Consider
broad-based index funds for a quick and easy solution.
7. MISJUDGING THE IMPACT TAXES HAVE ON NET RETURN.
Taxes can have a severe negative impact on your net return. As a result,
balance tax and investment considerations, but remember that suitability
and appropriateness of an investment take precedence over tax consequences.
Never hold an inappropriate investment.
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8. CONFUSING DIVERSIFICATION WITH ASSET ALLOCATION.
Many investors mistakenly believe that a properly diversified portfolio
is a properly allocated portfolio. This is the leading misconception
of asset allocation. Properly allocate your portfolio among the different
asset classes first and then diversify the investments within each
asset class.
By avoiding these biggest mistakes you will design an optimal portfolio
that provides the best opportunity to achieve and protect your financial
independence, control and security.
*Previously appeared at ArticleCity.com
About the Author:
Scott Frush, CFA, CFP is president of Bloomfield Hills, Michigan,
based Frush Financial Group and is editor and publisher of the Journal
of Asset Allocation. To subscribe to the free Journal of Asset Allocation,
visit www.AssetAllocationExpert.com.
Info@Frush.com
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