A few weeks ago, the CFA Institute (Chartered Financial Analysts) released the results of their member survey on the most common mistakes made by individual investors.  In this article, I will list the Top-12 (which is two better than David Letterman) and a brief comment on each. 

1. No strategy.  This is like going on a trip without planning where you are going.  Sometimes it will work and you'll have a good experience, but most of the time you'll end up getting lost.  Getting lost with your investments is not a good thing.  At Rall Capital Management, we work with our clients to develop an Investment Policy Statement (IPS) that considers an investor's time horizon, risk tolerance, goals, liquidity and cash flow needs.  An IPS is like a GPS for your investments.

2.  Buying individual stocks instead of creating a diversified portfolio.  Investing in individual stocks is riskier than owning a diversified mutual fund.  There are thousands of individual stocks that you can invest in…and that's just in the U.S.  How do you pick the right one(s)?  You should own a diversified portfolio covering the different major asset classes.

3. Investing in stocks instead of companies.  Too many people buy a stock without understanding the fundamental outlook of the company.  Buying a stock in a company because you like their product or service is a sure way to lose money.

4. Buying high.  This all-too-common mistake is caused by "performance chasing"…buying an investment because it has done well recently.  There are lots of examples of this one…the dot.com mania at the end of 1999 and the housing market in 2004 and 2005 a couple of good examples.  The emotion of greed kicks in and people buy because they are afraid of missing the boat…usually just before the boat sinks.

5. Selling low.  This can be just as costly as buying high.  Usually this occurs when the opposite emotion, fear, kicks in after a drop in the market or when an investment tanks.

6. Rapid turnover of investments.  Trading too often reinforces a focus on short-term performance over long-term fundamentals.  It also cuts into returns by increasing transaction costs, and possibly tax consequences.

7. Acting on tips.  You might think you have an inside scoop because of something you saw on CNBC or read in a financial magazine.  Do you really think you have an edge over the professional investors?  If you've heard it, so have a lot of others.

8. Paying too much in fees and commissions.  Too many people don't understand the fee structure that they are operating within.  You need to become fully informed on transaction costs, management fees, and other costs which may apply to a specific investment.

9. Too great a focus on tax avoidance.  While taxes should be a consideration in an investment decision, holding onto assets simply to avoid taxes can lead to poor investing decisions.  I have a client who would not sell the stock of a company he had worked for because he didn't want to pay taxes on his gain.  At the beginning of this decade, the stock was trading at $85/share.  Now, it's trading at $10/share.  He didn't pay taxes (which would have been 15% of his gain).  Instead, he lost about 90% of value.

10. Unrealistic expectations.  Investors who are willing to take risks to achieve above-average returns are usually the ones that will be most disappointed by a sudden market rout.  You need to stay focused on the long-term and try to set reasonable return expectations.

11. Neglect.  Many investors are not proactive about investing for the long-term because of discouragement and uncertainty.  Know what you don't know…and if you don't know…hire a professional.  And if you think it's too expensive to hire a professional, wait until you put your future in the hands of an amateur!

12. Not understanding risk tolerance.  Know your limits.  Do not wait until the panic of a market drop to decide that you've been taking on too much risk.

So, how many of the 12 apply to you?  If your answer is more than one, you should be working with a financial advisor…like Rall Capital Management.  Let us know if we can help you avoid these all-too-common mistakes.