Investment Mistakes Even Smart Investors Make and How to Avoid Them

Investment Mistakes Even Smart Investors Make and How to Avoid Them

Larry Swedroe, R. C. Balaban

Language: English

Pages: 231


Format: PDF / Kindle (mobi) / ePub

CBS MoneyWatch columnist Larry Swedroes bedrock principles for investing success

Investment Mistakes Even Smart Investors Make and How to Avoid Them helps anyone from the novice investor to the professional money manager become a more informed investor and ignore the kind of pervasive conventional wisdom that so often leads to financial loss.

Swedroe describes how behavioral mistakes and overconfidence can lead you to stray from proven investment principles, and he explains how to reverse these temptations and make the right investing decisions when it counts most.

Larry Swedroe is Principal and Director of Research at Buckingham Asset Management. He writes the popular blog Wise Investing at CBS











brilliant of mathematical geniuses will never be able to tell us what the future holds.”1 MISTAKE 38 Do You Take Risks Not Worth Taking? In March 2003, Larry met with a husband and wife who were both 71 years old and had financial assets of $3 million. Unfortunately, their portfolio was worth $13 million three years earlier. Larry knew that the only way they could have experienced that kind of loss was if they held a portfolio that not only was all, or almost all, equities but also was heavily

out of the markets are close to zero. The real danger for investors is not being there when the big up moves occur. Thus, the winning strategy is both to accept that markets cannot be timed and to build the expectation of black swans into an investment plan. In addition, broad global diversification, including an allocation to high-quality fixed-income assets sufficient to reduce overall portfolio risk to an acceptable level, helps mitigate the impact of the inevitable appearance of black swans.

before they locate bonds in that account. Again, municipal bonds can be held in taxable accounts. Commodities. As with REITs, those investors who value the diversification benefits of commodities should locate these assets in tax-advantaged accounts, even if that means having to hold fixed-income investments in taxable accounts. Liquidity needs. Investors with anticipated, or the potential for unanticipated, liquidity and cash flow needs from their taxable holdings should consider holding some

smaller. However, even for passive investors, the choice is not as simple as just looking at the expense ratios of the various alternatives and choosing the cheapest alternative. The reason is that not all “index” funds are created equal. While the expense ratio is important, it should not be the only consideration. A fund manager can add value in several ways that have nothing to do with active investing. Let’s explore some of the ways a fund can add value in terms of portfolio construction,

component. The principal value of the bond increases by the total of the fixed rate and the inflation component. The income is deferred for tax purposes until funds are withdrawn from the account holding the bond. Index fund A passively managed fund that seeks to replicate the performance of a particular index (such as the Wilshire 5000, the S&P 500, or the Russell 2000) by buying all the securities in that index in direct proportion to their weight within that index (by market capitalization).

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