Preventing Investment Mistakes: Ten Risk Minimizers

Most investment mistakes are caused by basic misunderstandings of the securities
markets and by invalid performance expectations. The markets move in totally
unpredictable cyclical patterns of varying duration and amplitude. Evaluating
the performance of the two major classes of investment securities needs to be
done separately because they are owned for differing purposes. Stock market
equity investments are expected to produce realized capital gains;
income-producing investments are expected to generate cash flow.

Losing money on an investment may not be the result of an investment mistake,
and not all mistakes result in monetary losses. But errors occur most frequently
when judgment is unduly influenced by emotions such as fear and greed,
hindsightful observations, and short-term market value comparisons with
unrelated numbers. Your own misconceptions about how securities react to varying
economic, political, and hysterical circumstances are your most vicious enemy.

Master these ten risk-minimizers to improve your long-term investment
performance:

1. Develop an investment plan. Identify realistic goals that include
considerations of time, risk-tolerance, and future income requirements--- think
about where you are going before you start moving in the wrong direction. A well
thought out plan will not need frequent adjustments. A well-managed plan will
not be susceptible to the addition of trendy speculations.

2. Learn to distinguish between asset allocation and diversification decisions.
Asset allocation divides the portfolio between equity and income securities.
Diversification is a strategy that limits the size of individual portfolio
holdings in at least three different ways. Neither activity is a hedge, or a
market timing devices. Neither can be done precisely with mutual funds, and both
are handled most efficiently by using a cost basis approach like the Working
Capital Model.

3. Be patient with your plan. Although investing is always referred to as long-
term, it is rarely dealt with as such by investors, the media, or financial
advisors. Never change direction frequently, and always make gradual rather than
drastic adjustments. Short-term market value movements must not be compared with
un-portfolio related indices and averages. There is no index that compares with
your portfolio, and calendar sub-divisions have no relationship whatever to
market, interest rate, or economic cycles.

4. Never fall in love with a security, particularly when the company was once
your employer. It's alarming how often accounting and other professionals refuse
to fix the resultant single-issue portfolios. Aside from the love issue, this
becomes an unwilling-to-pay-the-taxes problem that often brings the unrealized
gain to the Schedule D as a realized loss. No profit, in either class of
securities, should ever go unrealized. A target profit must be established as
part of your plan.

5. Prevent "analysis paralysis" from short-circuiting your decision-making
powers. An overdose of information will cause confusion, hindsight, and an
inability to distinguish between research and sales materials--- quite often the
same document. A somewhat narrow focus on information that supports a logical
and well-documented investment strategy will be more productive in the long run.
Avoid future predictors.

6. Burn, delete, toss out the window any short cuts or gimmicks that are
supposed to provide instant stock picking success with minimum effort. Don't
allow your portfolio to become a hodgepodge of mutual funds, index ETFs,
partnerships, pennies, hedges, shorts, strips, metals, grains, options,
currencies, etc. Consumers' obsession with products underlines how Wall Street
has made it impossible for financial professionals to survive without them.
Remember: consumers buy products; investors select securities.

7. Attend a workshop on interest rate expectation (IRE) sensitive securities and
learn how to deal appropriately with changes in their market value--- in either
direction. The income portion of your portfolio must be looked at separately
from the growth portion. Bottom line market value changes must be expected and
understood, not reacted to with either fear or greed. Fixed income does not mean
fixed price. Few investors ever realize (in either sense) the full power of this
portion of their portfolio.

8. Ignore Mother Nature's evil twin daughters, speculation and pessimism.
They'll con you into buying at market peaks and panicking when prices fall,
ignoring the cyclical opportunities provided by Momma. Never buy at all time
high prices or overload the portfolio with current story stocks. Buy good
companies, little by little, at lower prices and avoid the typical investor's
buy high, sell low frustration.

9. Step away from calendar year, market value thinking. Most investment errors
involve unrealistic time horizon, and/or "apples to oranges" performance
comparisons. The get rich slowly path is a more reliable investment road that
Wall Street has allowed to become overgrown, if not abandoned. Portfolio growth
is rarely a straight-up arrow and short-term comparisons with unrelated indices,
averages or strategies simply produce detours that speed progress away from
original portfolio goals.

10. Avoid the cheap, the easy, the confusing, the most popular, the future
knowing, and the one-size-fits-all. There are no freebies or sure things on Wall
Street, and the further you stray from conventional stocks and bonds, the more
risk you are adding to your portfolio. When cheap is an investor's primary
concern, what he gets will generally be worth the price.

Compounding the problems that investors face managing their investment
portfolios is the sensationalism that the media brings to the process. Step away
from calendar year, market value thinking. Investing is a personal project where
individual/family goals and objectives must dictate portfolio structure,
management strategy, and performance evaluation techniques.

Do most individual investors have difficulty in an environment that encourages
instant gratification, supports all forms of speculation, and gets off on
shortsighted reports, reactions, and achievements? Yup.

Steve Selengut
http://www.sancoservices.com
http://www.kiawahgolfinvestmentseminars.com
Author of: "The Brainwashing of the American Investor: The Book that Wall Street
Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"



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