CFA Society lists 12 costly mistakes investors make

April TAN

Investing can be a daunting and risky endeavor, but the right discipline and expert advice can spell the difference between potential losses and a substantial kitty upon retirement.

That was the gist of the recent media briefing held by the CFA Society Philippines, the local chapter of the global CFA Institute, best known for its stringent chartered financial analyst program credentials offered to finance and investment professionals.

The briefing, led by CFA Philippines president April Tan, focused on the 12 mistakes that investors usually make that could sabotage their financial goals.

Tan, also research head at Philippine stock brokerage firm COL Financial Group, likewise shared tips about managing one’s finances as one moves up the pay scale.

One common problem, she noted, was how salaried individuals manage to save so little for investments despite raking in more money from job promotions and bonuses.

While that is usually traced to the upgrading one’s lifestyle, Tan said those gunning for more sustainable wealth should practice discipline.

“When you get a pay increase, always increase your savings,” Tan said, adding that this could be done without sacrificing additional luxuries. “Make a promise to your future self by saving 50 percent of your annual pay increase.”

She gave other tips like removing or reducing consumer debt—which charge among the highest interest rates.

For credit cards, this rate hovers at around 18 percent annually, she said.

While the current stock market boom might be able to cover that, Tan noted this was an extraordinary time for equities and it remains uncertain how long the current bullish environment—driven by ample global liquidity—will last.

“We are fortunate that we are enjoying a very long boom market since 2008, 2009… a time will come when that will change,” said Tan, who further advised a more diversified strategy with a healthy mix of funds.

Putting 100 percent of the portfolio in the stock market is “a very risky business,” she said.

The briefing this week came as the CFA Institute is recognizing May as “putting investors first month.” This is the second time the institute is embarking on this campaign following a successful 2014 run, which involved 58 cities globally and over 60,000 investment professionals.

As noted, CFA Institute also discussed the 12 common mistakes investors make, which we are publishing, slightly edited, below:

• Having no investment strategy

A well-planned strategy takes into account several important factors, including time horizon, tolerance for risk, amount of investable assets and planned future contributions.

• Buying individual stocks instead of a diversified portfolio of securities

Investors should maintain a broadly diversified portfolio incorporating different asset classes and investment styles. Failing to diversify leaves individuals vulnerable to fluctuations in a particular security or sector.

• Buying stocks, not companies

Investing is not gambling and shouldn’t be treated as a hit-or-miss proposition potential. Analyze the fundamentals of the company and industry, not day-to-day shifts in stock price.

• Buying high

The fundamental principle of investing is buy low and sell high. Others at risk for “buying high” are those who follow investment fads, buying the “popular” stocks of the day. Typically, these investments become fashionable for brief periods, leading many to invest at the height of a cycle or trend—just in time to ride it downward.

• Selling low

The flip side of the buy-high-sell-low mistake can be just as costly. It’s far better to take the loss and redeploy the assets toward a more promising investment.

• Churning your investments

Too-frequent trading cuts into investment returns more than anything else. Again, the solution is a long-term buy-and-hold strategy, rather than an active trading approach.

• Acting on “tips” and “sound bites”

Listening to the media for their sole source of investment thinking rather than pursuing a professional relationship with an advisor is a far too common investor mistake. While breaking news and “insider tips” may seem like a promising way to give your portfolio a quick boost, always remember you are investing against professionals who have access to teams of research analysts.

• Paying too much in fees and commissions

Incredibly, investors are often hard-pressed to cite specifics on the fee structure employed by their investment service provider, including management fees and transactions costs. Investors should make sure they are fully informed as to the associated expenses that accompany every potential investment decision.

• Decision-making by tax avoidance

While individuals should be aware of the tax implications of their actions, the first objective should always be to make the fundamentally sound investment decision. Some investors, rather than pay a large capital gains tax, will allow the value of shares in a well-performing stock to grow so large it accounts for an inordinate percentage of their overall portfolio.

• Unrealistic expectations

It is important to take a long-term view of investing and not allow external factors cloud actions and cause you to make a sudden and significant change in strategy. Comparing the performance of your portfolio with relevant benchmark indexes can help an individual develop realistic expectations.

• Neglect

Individuals often fail to begin an investment program simply because they lack basic knowledge of where or how to start. Likewise, periods of inactivity are frequently the result of discouragement over previous investment losses or negative growth in the equities markets.

• Not knowing your real tolerance for risk

Keep in mind that there is no such thing as risk-free investing. In general, individuals planning for long-term goals should be willing to assume more risk in exchange for the possibility of greater rewards.

The unstated rule no. 13, of course, is to tap a responsible fund manager or financial adviser, especially for inexperienced investors.

Robert Ramos, CFA vice president and trust officer at Union Bank of the Philippines, said that while it was difficult to determine early-on which fund managers are the right ones, there are some tell-tale signs.

“If an adviser comes to you and says what do you want to do, what is your objective and what is your risk [tolerance]? And if that is the first thing they have in mind, that’s a plus,” Ramos said.

He contrasted this to other styles where the fund manager will insist on selling products before understanding the client’s needs first.

A parting tip from Tan is to invest regularly, and to take a long-term view—15 years or more—to erase any short term volatility, as well as headaches.

“The buy and hold [strategy] is boring but over the long-term, it performs better,” Tan said.