Midweek Musings – the 2 most common investor errors

Diversification – remember what that means.

All investors make mistakes, even those as famous as Warren Buffet or Terry Smith.

Purchasing investments is about applying general, sound principles that are rooted in the very essence of capitalism and diligent application of those principles and some common sense will always result in acceptable returns over the long run.

However, even though a diversified portfolio of quality funds will always make money long term (if it didn’t, capitalism would have failed too), we can all have components in our portfolios that we worry about, because they are not making money at the moment.

Furthermore, when we pick funds or shares, we are making a judgement based on logic and the data we have available. The facts can and do change or we may even have had incomplete data, or misunderstood its meaning, so we will (all of us) buy investments that are unsuitable when reviewed with that wonderful all-knowing review tool called hindsight.

I used to estimate that I would regret recommending one or two out of every ten funds I put in front of clients. Over the years, the error rate improved, but I still make mistakes now (eg backing fintech at the wrong point in the cycle).

Never forget that if a portfolio did not have any funds performing in a different way to the general market trend, by definition, it would not be diversified.

It would be unsusual, for example, for the large cap global growth funds in your portfolio to be doing well and at the same time to be raking it in on your defensive value funds. If the markets like Tesla and Netflix, they almost certainly don’t want to buy Nestle or Unilever (and vice versa). You might think that you can tactically switch between funds to be always in line with the relevant market factors and if you can do that well, I recommend that you start up your own investment blog!

In reality, and I say this based on over 30 years of reviewing portfolios with investors, human nature means that nearly everyone, on scanning a list of owned funds with recent past performance numbers, will focus on the funds that are showing losses, generally without any reference to their portfolio weighting, when they were bought or what the difference is between performance over varying time periods.

Thinking about this calmly and objectively, we might be tempted into saying – ‘Oh, that’s not me – I take the long view and once I have understood why a fund is underperforming for now, I am chilled about it’.

I am sorry to say that my experience is that even if investors (and I include most IFAS in this analysis) would like to see themselves that way, almost everyone actually stresses out about the funds they own with red or negative numbers showing in their reports.