Last Updated: March 1, 2011
When it comes to investing, mistakes are easy to make. In some cases, however, they could be easy to avoid. In his book, Asset Allocation for Dummies, FPA member, Jerry Miccolis, CFA, CFP®, FCAS, MAA, identified the 10 most common asset allocation mistakes and the ways to avoid them.
- Ignoring asset allocation in the first place. There's a big difference between investing and speculating. Investing relies on asset allocation which is a methodical, top-down, scientific approach. "It might be boring," Miccolis wrote. "But asset allocation should be the centerpiece of your plan to fulfill your financial goals."
- Believing that diversification is enough. "Don't confuse asset allocation with diversification," he writes. Asset allocation requires that you be diversified.
- Forgetting to rebalance. After you set your target asset allocation, it's likely that you will have to buy and sell investments to bring your mix back to the target mix.
- Not having a long-term plan. This is work, but it's work that will pay off. You need to think about your goals and sources of income and plan for the next 10, 20 and 30 years; your risk tolerance; and your asset allocation. What's more, you need to document and stick to your plan.
- Indulging your emotions. "Don't let your emotions get the best of you," he wrote. "You may get lucky ever once in a while, but you can't count on emotion to produce the results you want over the long haul."
- Paying too much attention to the financial media. "Don't turn to the financial media for investment advice," Miccolis wrote. "Instead, use the news to keep up on general trends."
- Chasing performance. "Don't chase the hot stock, fund, or sector," he wrote. "Stick with your long-term investment plan, which is based on good, solid science, and rebalance regularly."
- Thinking you can outsmart the market. "Don't fall for active management or marketing timing," he wrote. "Don't bet your financial future on dumb luck. Stick with informed asset allocation and rebalancing instead."
- Ignoring taxes. "Don't forget to take a long look at what you're losing in taxes, and what portion of that you could keep if you made a few tweaks to your portfolio," Miccolis wrote.
- Disrespecting inflation. "Wealth is only meaningful in terms of its purchasing power," Miccolis wrote. "Make sure (within your tolerance for risk) that you have a portfolio that generates a healthy long-term expected return in excess of inflation."