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Investment Mistakes Even Smart Investors Make and How to Avoid Them

Book Description

EVERYONE MAKES MISTAKES. THIS BOOK SHOWS YOU HOW TO MAKE MONEY.

“Swedroe and Balaban show you how to avoid being your own worst enemy and how to win the investment game by not losing.”

—Burton G. Malkiel, author of A Random Walk Down Wall Street

“Sure, we’ve all made mistakes, and they can be pretty expensive, even the first time. This wonderful volume will pay for itself a thousand times over.”

—William Bernstein, author of A Splendid Exchange and The Investor’s Manifesto

“In his new book, Larry Swedroe—America’s preeminent writer on passive investing—shows you how to recognize your mistakes and, more importantly, how to avoid future mistakes to secure a worry-free financial future. This book will prove to be a classic blueprint on sidestepping the blunders made by even the smartest of investors.”

—Bill Schultheis, author of The New Coffeehouse Investor

“This is a book that does not belong on your bookshelf; it belongs in your hands. Buy it, read it (and it’s fun reading), and prosper.”

—Harold Evensky, President, Evensky & Katz Wealth Management

“Swedroe’s tour through the world of money and psychology is a trip every investor should take.”

—Gary Belsky, coauthor, Why Smart People Make Big Money Mistakes...And How to Correct Them

With a Foreword by Meir Statman, author of award-winning What Investors Really Want

Even the most experienced investors in the world can screw up—and don’t let anyone tell you otherwise. Whether you’re an old pro with a well-designed portfolio or a newbie investor just starting out, bestselling author Larry Swedroe with RC Balaban can show you how to “live and learn” from others’ mistakes—and invest in good times and bad.

By answering the key questions every investor should ask, you’ll learn how to avoid:

Mistake #1: Feeling too confident in your investing skills

Mistake #6: Allowing yourself to be swayed by popular opinion

Mistake #11: Holding on to assets because of the price you paid

Mistake #15: Letting friendships influence your choice of advisors

Mistake #31: Expecting miracles from hedge fund managers

Mistake #48: Confusing speculation with investing

Mistake #60: Underestimating the number of stocks you need to diversify

Mistake #71: Forgetting that you can be too conservative

Mistake #77: Repeating the same mistake

Be warned: This groundbreaking guide will shatter the myths about money you’ve come to accept and challenge the conventional wisdom you’ve received from friends, advisors, and other “experts.”

By exposing these all-too-common mistakes, one by one, you’ll be able to rethink your strategy and reinvest in your future with confidence. You’ll discover the truth about misleading demographics, “high-return” investments, active managers, and other resources you should—or shouldn’t—trust.

You’ll learn the actual devastating effect taxes can have on your returns if you use the wrong strategy. You’ll learn the wrong way and the right way to build your portfolio, diversify your accounts, and plan for your family’s future. Most important, this book will show you how to avoid making the investment mistakes you used to make and how to give yourself the best chance of achieving your financial goals.

Filled with insider insight, need-to-know advice, and revealing case studies, this is the one book smart investors can learn from—and even smarter investors can invest in.

Table of Contents

  1. Cover Page
  2. Investment Mistakes Even Smart Investors Make and How to Avoid Them
  3. Copyright Page
  4. CONTENTS
  5. FOREWORD
  6. PREFACE
  7. PART 1 Understanding and Controlling Human Behavior Is Important for Investment Success
    1. MISTAKE 1 Are You Overconfident of Your Skills?
    2. MISTAKE 2 Do You Project Recent Trends Indefinitely into the Future?
    3. MISTAKE 3 Do You Believe Events Are More Predictable After the Fact Than Before?
    4. MISTAKE 4 Do You Extrapolate from Small Samples and Trust Your Intuition?
    5. MISTAKE 5 Do You Let Your Ego Dominate the Decision-Making Process?
    6. MISTAKE 6 Do You Allow Yourself to Be Influenced by a Herd Mentality?
    7. MISTAKE 7 Do You Confuse Skill and Luck?
    8. MISTAKE 8 Do You Avoid Passive Investing Because You Sense a Loss of Control?
    9. MISTAKE 9 Do You Avoid Admitting Your Investment Mistakes?
    10. MISTAKE 10 Do You Pay Attention to the “Experts”?
    11. MISTAKE 11 Do You Let the Price Paid Affect Your Decision to Continue to Hold an Asset?
    12. MISTAKE 12 Are You Subject to the Fallacy of the “Hot Streak”?
    13. MISTAKE 13 Do You Confuse the Familiar with the Safe?
    14. MISTAKE 14 Do You Believe You Are Playing with the House’s Money?
    15. MISTAKE 15 Do You Let Friendships Influence Your Choice of Investment Advisors?
  8. PART 2 Ignorance Is Not Bliss
    1. MISTAKE 16 Do You Fail to See the Poison Inside the Shiny Apple?
    2. MISTAKE 17 Do You Confuse Information with Knowledge?
    3. MISTAKE 18 Do You Believe Your Fortune Is in the Stars?
    4. MISTAKE 19 Do You Rely on Misleading Information?
    5. MISTAKE 20 Do You Only Consider the Operating Expense Ratio When Selecting a Mutual Fund?
    6. MISTAKE 21 Do You Fail to Consider the Costs of an Investment Strategy?
    7. MISTAKE 22 Do You Confuse Great Companies with High-Return Investments?
    8. MISTAKE 23 Do You Understand How the Price Paid Affects Returns?
    9. MISTAKE 24 Do You Believe More Heads Are Better Than One?
    10. MISTAKE 25 Do You Believe Active Managers Will Protect You from Bear Markets?
    11. MISTAKE 26 Do You Fail to Compare Your Funds with Proper Benchmarks?
    12. MISTAKE 27 Do You Focus on Pretax Returns?
    13. MISTAKE 28 Do You Rely on a Fund’s Descriptive Name When Making Purchase Decisions?
    14. MISTAKE 29 Do You Believe Active Management Is a Winner’s Game in Inefficient Markets?
    15. MISTAKE 30 Do You Fail to Understand the Tyranny of the Efficiency of the Market?
    16. MISTAKE 31 Do You Believe Hedge Fund Managers Deliver Superior Performance?
    17. MISTAKE 32 Are You Subject to the Money Illusion?
    18. MISTAKE 33 Do You Believe Demographics Are Destiny?
    19. MISTAKE 34 Do You Follow a Prudent Process When Choosing a Financial Advisory Firm?
  9. PART 3 Mistakes Made When Planning an Investment Strategy
    1. MISTAKE 35 Do You Understand the Arithmetic of Active Management?
    2. MISTAKE 36 Do You Understand That Bear Markets Are a Necessary Evil?
    3. MISTAKE 37 Do You Treat the Highly Likely as Certain and the Highly Unlikely as Impossible?
    4. MISTAKE 38 Do You Take Risks Not Worth Taking?
    5. MISTAKE 39 Do You Confuse Before-the-Fact Strategy with After-the-Fact Outcome?
    6. MISTAKE 40 Do You Believe Stocks Are Risky Only If Your Horizon Is Short?
    7. MISTAKE 41 Do You Try to Succeed Even When Success Is Highly Unlikely?
    8. MISTAKE 42 Do You Understand the Importance of Saving Early in Life?
    9. MISTAKE 43 Do You Fail to Evaluate the Real Cost of an Expenditure?
    10. MISTAKE 44 Do You Believe Diversification Is the Right Strategy Only If the Investment Horizon Is Long?
    11. MISTAKE 45 Do You Believe That This Time It’s Different?
    12. MISTAKE 46 Do You Fail to Tax-Manage Your Portfolio Throughout the Year?
    13. MISTAKE 47 Do You Let Taxes Dominate Your Decisions?
    14. MISTAKE 48 Do You Confuse Speculating with Investing?
    15. MISTAKE 49 Do You Try to Time the Market?
    16. MISTAKE 50 Do You Rely on Market Gurus?
    17. MISTAKE 51 Do You Use Leverage to Try to Enhance Investment Returns?
    18. MISTAKE 52 Do You Understand That There Is Only One Way to Be a Buy-and-Hold Investor?
    19. MISTAKE 53 Do You Work with Commission-Based Advisors?
    20. MISTAKE 54 Do You Spend Too Much Time Managing Your Portfolio?
    21. MISTAKE 55 Do You Prepare Your Heirs?
    22. MISTAKE 56 Did You Begin Your Investment Journey without a Road Map?
    23. MISTAKE 57 Do You Understand the Nature of Risk?
  10. PART 4 Mistakes Made When Developing a Portfolio
    1. MISTAKE 58 Do You Consider Investments in Isolation?
    2. MISTAKE 59 Do You Have Too Many Eggs in One Basket?
    3. MISTAKE 60 Do You Underestimate the Number of Stocks Needed to Build a Diversified Portfolio?
    4. MISTAKE 61 Do You Believe Diversification Is Determined by the Number of Securities Held?
    5. MISTAKE 62 Do You Believe Focused Funds Outperform?
    6. MISTAKE 63 Do You Understand That in Times of Crisis the Correlations of All Risky Assets Rise?
    7. MISTAKE 64 Do You Fail to Consider Your Labor Capital When Constructing Your Portfolio?
    8. MISTAKE 65 Do You Believe the Investment World Is Flat?
    9. MISTAKE 66 Do You Confuse Indexing with the Exclusive Use of an S&P 500 Fund?
    10. MISTAKE 67 Do You Consider Your Home as Your Exposure to Real Estate?
    11. MISTAKE 68 Do You Fail to See the Risk in High-Yield Investments?
    12. MISTAKE 69 Do You Purchase Products Meant to Be Sold, Not Bought?
    13. MISTAKE 70 Do You Chase the IPO Dream?
    14. MISTAKE 71 Do You Understand That You Can Be Too Conservative?
    15. MISTAKE 72 Is Your Withdrawal Assumption Rate in Retirement Too Aggressive?
    16. MISTAKE 73 Do You Hold Assets in the Wrong Location?
    17. MISTAKE 74 Do You Believe That All Passively Managed Funds Are Created Equal?
    18. MISTAKE 75 Do You Trust but Fail to Verify?
    19. MISTAKE 76 Do You Have a Plan B?
    20. MISTAKE 77 Do You Keep Repeating the Same Mistakes?
  11. CONCLUSION
  12. ENDNOTES
  13. GLOSSARY
  14. ACKNOWLEDGMENTS
  15. Index
  16. ABOUT THE AUTHORS