By CFA Institute*
Investing is fun and very rewarding, especially, if you know the “rules of the game.”
There are some simple rules to follow. Ignoring them, or making mistakes in applying them, can be very risky. Making mistakes repeatedly could drain your assets very quickly.
“Creating a program to confidently boost investment success is not easy,” said Mark Yu, CFA, president of CFA Philippines, the local affiliate of CFA Institute, which administers the CFA® (Chartered Financial Analyst®) Program worldwide. “Investors are sometimes their own worst enemy by making common mistakes.” CFA Institute asked selected members to come up with 11 frequent and costly pitfalls that individual investors should avoid.
- Having no investment strategy. Every investor must develop an investment strategy that will serve as a guide. A well-planned strategy considers time horizon, risk tolerance, amount of investable assets and planned future contributions.
- Investing in individual stocks instead of in a diversified portfolio of securities. Investors should keep a broadly diversified portfolio incorporating different asset classes and investment styles. Failure to do so leaves individuals subject to fluctuations in a particular security or sector.
- Investing in “stocks” instead of in “companies.” Invest in finance enterprises that are likely to have a positive long-term growth potential. Analyze the fundamentals of the company and industry, not day-to-day shifts in stock price. To avoid difficulties, examine a company’s corporate governance profile to ensure that it has basic corporate governance protections.
- Buying high. Many people commit the mistake of investing in stocks that did well in previous years or in “popular” stocks of the day assuming that these will also do well in the future. Remember that the fundamental principle of investing is to buy low and sell high, not the other way around.
- Selling low. Not every investment will increase in value. Even professional investors have difficulty beating the S&P 500 index in a year. Always have a stop-loss order on a stock that might fall in price. It’s better to take a small loss and redeploy the assets toward a more promising investment.
- Churning your investments. Too much trading cuts into investment returns, because of transaction costs. The solution is to adopt a long-term buy-and–hold strategy, rather than active trading.
- Acting on “tips” and “soundbites.” Veteran investors gather information from several independent sources and conduct their own proprietary research and analysis before making an investment decision.
- Paying too much in fees and commissions. Investors should be well-informed with the associated expenses that accompany every potential investment decision.
- Unrealistic expectations. Take a long-term view when making investments. Don’t allow external factors to cloud your actions or to cause a sudden shift in strategy.
- Neglect. Individuals often fail at investing, because they don’t know where to start, or because they neglect their holdings.
- Not knowing your real tolerance for risk. Investments always come with risks. Don’t wait for a sudden drop of value of assets to determine your level of risk tolerance.
About CFA Institute
CFA Institute is the global association for investment professionals. It administers the CFA® (Chartered Financial Analyst®) and CIPM (Certificate in Investment Performance Measurement) curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 95,600 members, who include the world’s 82,400 CFA charterholders, in 134 countries and territories, as well as 135 affiliated professional societies in 56 countries and territories. More information may be found at www.cfainstitute.org
About CFA Society of the Philippines
In 1995, the CFA® (Chartered Financial Analyst®) exam was first introduced in the Philippines, with the support of the Capital Markets Development Council, Inc. (CMDCI). On July 1997, a group of CFA candidates, practitioners from the investment community and members of the academe gathered to form a society in response to the growing need to set higher standards in the investment community - in terms of knowledge, competence, professionalism and, above all, ethics. Thus, CFA Philippines, formerly known as the Association of Investment Professionals – Manila, was established.
CFA Philippines is the local affiliate of US-based CFA Institute. Its mission and vision is to be the premier association in the Philippines’ investment and finance profession by promoting competence, professionalism and the highest ethical standards.
September 3rd, 2008 at 12:06 am
KABAYAN
An intelligent investor will always use his common sense when investing.
My take is . . . if the article is truly promoting about fundamental analysis then the STOP LOSSES it suggests should never be based on market sentiments because they are always misleading and when market behaves irrationally, stock prices do not reflect their real values especially when the crowd starts to panic. Intelligent investors consider selling only if the fundamentals of the company suffers and its potential growth is already in question. However, if the problem is manageable and if the company remains to have the potential growth, there is no need to react.
Who cares if the stock has fallen 50% or even more as long as the company remains sound ? If you read the article again it is implied that the investor is suggested to sell at a little loss and discourage letting the stock drop further.
True long term investors using fundamental analysis solely based his decision on the health and potential of the company REGARDLESS what the hell is the market is doing.
Warren Buffet and Peter Lynch are never bothered by percentage losses but by the general health and condition of the company. And why do they behave that way ? Because they know what they are doing.
Peter Lynch says:
Stocks can go lower. I’ve bought stocks at $12 that went to $2, but then they later went to $30. You just don’t know when you can find the bottom.
So, like these two guys, the STOP LOSSES discussed in the article is absolutely inconsistent with its stand on fundamental analysis and the writer is clearly bothered and emotionally carried by market reaction.
Therefore as a reader I strongly doubt if it was written by a true investor.
August 25th, 2008 at 11:16 pm
Hi Kabayan and Sunjun:
Thanks for your responses. The BPI Global Equity Fund is what I’m looking for. This is not really for myself (since I don’t live in the Philippines) but for my brother who still lives there and wants to start investing in the stock market. I’ve told him that he needs to be globally diversified to benefit from growth in other parts of the world, not just the Philippines. The BPI fund hopefully should also enable him to hedge against the Philippine peso since the fund is denominated in US dollars.
On the downside, the BPI fund looks like an actively managed fund. I wish someone could offer a global index fund which would cut costs. I’m an indexer myself, and I appreciate the virtues of indexing.
August 25th, 2008 at 9:47 pm
as with any task/skill/experience is still the best teacher…
August 25th, 2008 at 11:38 am
Thanks! Sunjun. I stand corrected…and I’m very glad to see that there is some offerings for global exposure. Though it’s important to note that both ING and BPI are fund of funds (I guess this is how they got around the reglations?), and frankly the BPI offering is really substandard - 22% in cash/cash instruments (why such an overweight in non-equity), also the fund families…Horizon, Pioneer..aren’t to my estimation good core players. Nonetheless, it is a step in the right direction! Kudos to whomever had a hand in this. By the way, now is the time to seek these…as always do your homework.
To Indexrider: As your name denotes, I can see why you’re a big fundamentals believer (me too). However, the application of a stop-loss rider isn’t necessarily contrary to one that would apply a pure long-term strategy, don’t care who you are at some point you get out of certain positions…no fund/sma manager in the world (even one the most long term guru’s WBuffet) has ever bought a stock put it in a safe and threw away the key so to speak. Though, I’m with you on indexes…that would be a great blog to start…though not enough vehicles available in Pinas yet for this topic to be of big help.
Regards to all and keep investing!
August 23rd, 2008 at 11:54 pm
the link for BPI’s equity fund didn’t work. Sending it here again.
http://info.bpiexpressonline.com/bpiprod/prodserv.nsf/Investment+Funds/InvestmentQPR
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