According to the IRS:
* The top 1% of income-earners ($380,354 and up) earn 20% of income; they pay 38% of all income taxes.
* The top 10% ($113,799 and up) earn 46% of income; they pay 70% of the income taxes.
* The bottom 90% (earning below $113,799) earn 54% of the income; they pay 30% of the income taxes.
* The bottom 50% earn 13% of income; they pay 3% of the income taxes.
An investing and financial strategies blog offered by Gary Partoyan, veteran financial advisor and owner of Potomac Wealth Strategies, LLC.
Friday, December 17, 2010
Active Management CAN work!
Despite what we read in the press almost every week, there are plenty of mutual funds and some money managers that, after fees and costs and expenses, have outperformed their benchmarks both purely and adjusted-for-risk for long and consistent track records.
Even in bonds, where the margins are probably a lot thinner than with equities.
I don't know how to do it myself, so I am not a fund manager. But I know how to separate managers like we are warned warning against from those with track-records worthy of my clients' and my own money.
The minute I lose confidence in my ability to discern between the consistently worthy managers and the rest, we'll all be using index fund portfolios, and I'll be shifting from being an investment advisor to being a financial planner.
But that's not happening yet. No way!
Here's an example of how my mutual fund portfolio for "moderate" investors compares to the U.S. stock market and to a portfolio of low-cost index funds from Fidelity that represent a similar 60% stocks, 40% bonds portfolio:
Average Annual Return Comparison
Time Frame PWS' 60 Flex S&P 500 Index Funds 60/40
1 yr 14.10 16.52 11.31
3 yr 7.04 -6.49 -1.88
5 yr 10.47 1.73 4.30
10 yr 11.06 -0.02 3.71
*Data is through 10/31/10; volatility (Standard Deviation) for mine is lower and Alpha his higher, too.
Even in bonds, where the margins are probably a lot thinner than with equities.
I don't know how to do it myself, so I am not a fund manager. But I know how to separate managers like we are warned warning against from those with track-records worthy of my clients' and my own money.
The minute I lose confidence in my ability to discern between the consistently worthy managers and the rest, we'll all be using index fund portfolios, and I'll be shifting from being an investment advisor to being a financial planner.
But that's not happening yet. No way!
Here's an example of how my mutual fund portfolio for "moderate" investors compares to the U.S. stock market and to a portfolio of low-cost index funds from Fidelity that represent a similar 60% stocks, 40% bonds portfolio:
Average Annual Return Comparison
Time Frame PWS' 60 Flex S&P 500 Index Funds 60/40
1 yr 14.10 16.52 11.31
3 yr 7.04 -6.49 -1.88
5 yr 10.47 1.73 4.30
10 yr 11.06 -0.02 3.71
*Data is through 10/31/10; volatility (Standard Deviation) for mine is lower and Alpha his higher, too.
Where Do Millionaires Get Their Money?
Most get their money by working, earning and saving.
80% of US millionaires are the first-generation of their families to get to that level.
Only a very few of them are celebrities and athletes and Wall St all-stars. Most of them are just like you and me, but with a bit more luck, or a better idea, or a better work-ethic. Or a better savings/investment plan...
If you save 5% of your income, you'll have some extra money in retirement to supplement Social Security and any pension you might have. If you save 15%, there's a very good chance you'll be a millionaire.
Talk to me about your strategy. It's what we do, and it works.
80% of US millionaires are the first-generation of their families to get to that level.
Only a very few of them are celebrities and athletes and Wall St all-stars. Most of them are just like you and me, but with a bit more luck, or a better idea, or a better work-ethic. Or a better savings/investment plan...
If you save 5% of your income, you'll have some extra money in retirement to supplement Social Security and any pension you might have. If you save 15%, there's a very good chance you'll be a millionaire.
Talk to me about your strategy. It's what we do, and it works.
Thursday, December 2, 2010
The Financial Crisis Was Worse Than We Thought
Per the information released this week by the Federal Reserve, there was a lot more scrambling, perhaps panicking, in the financial markets that most even know. And we knew it was bad. Cases in point:
1) The Federal Reserve has released details on the $3.3T (TRILLION) it extended via more than 21,000 transactions during the financial crisis. The extent of the Fed's aid included help to foreign firms
2) The Fed's Primary Dealer Credit Facility was tapped 84 times by Goldman Sachs, 212 times by Morgan Stanley, and almost daily by Citigroup through April 2009. And most of us know about Bear Stearns and Lehman Brothers.
3) The Fed lent cash to more than a thousand companies, including McDonald's, GE, and Harley-Davidson. Those companies are extremely sound financially, or maybe they weren't. All say they have paid-back their loans.
4) UBS, a Swiss bank whose retail brokerage unit is one of the biggest in the US (comparable to Morgan Stanley, Merrill Lynch and SmithBarney), borrowed a total of $74.5B. Barclays borrowed $47.9B.
5) Nine of the ten largest money-market fund companies, including BlackRock, arguably the best in the business for that ultra-conservativ-but-not-government-guaranteed cash management stuff, turned to the Fed for support.
6) Foreign central banks received nearly $600B of credit.
Say what you want about the politics and economics of the rescue and recovery plans, but the whole entire "city" was on fire, and wondering how to pay the water bill was, at the time, a bit beside the point.
WHAT DO WE DO? Live within or even below your means, have an emergency reserve fund, prioritize your priorities (saving for college is great, but are you on-track for at least a half-decent standard of living in retirement, and do you have life and disability insurance policies that will provide enough to your family if you die or can't work?), and invest around the globe in diversified and nimble portfolios.
1) The Federal Reserve has released details on the $3.3T (TRILLION) it extended via more than 21,000 transactions during the financial crisis. The extent of the Fed's aid included help to foreign firms
2) The Fed's Primary Dealer Credit Facility was tapped 84 times by Goldman Sachs, 212 times by Morgan Stanley, and almost daily by Citigroup through April 2009. And most of us know about Bear Stearns and Lehman Brothers.
3) The Fed lent cash to more than a thousand companies, including McDonald's, GE, and Harley-Davidson. Those companies are extremely sound financially, or maybe they weren't. All say they have paid-back their loans.
4) UBS, a Swiss bank whose retail brokerage unit is one of the biggest in the US (comparable to Morgan Stanley, Merrill Lynch and SmithBarney), borrowed a total of $74.5B. Barclays borrowed $47.9B.
5) Nine of the ten largest money-market fund companies, including BlackRock, arguably the best in the business for that ultra-conservativ-but-not-government-guaranteed cash management stuff, turned to the Fed for support.
6) Foreign central banks received nearly $600B of credit.
Say what you want about the politics and economics of the rescue and recovery plans, but the whole entire "city" was on fire, and wondering how to pay the water bill was, at the time, a bit beside the point.
WHAT DO WE DO? Live within or even below your means, have an emergency reserve fund, prioritize your priorities (saving for college is great, but are you on-track for at least a half-decent standard of living in retirement, and do you have life and disability insurance policies that will provide enough to your family if you die or can't work?), and invest around the globe in diversified and nimble portfolios.
Wednesday, November 17, 2010
GM IPO For Insiders Only
The federal government used the public coffers to bail-out General Motors. Regardless of one's feelings about that government action, the fact is "we" all bailed-out GM, but only some of "us" are going to benefit directly from the Initial Public Offering of the newly-revitalized GM.
Ordinarily, this is fine. A company wants to issue publicly traded shares of its stock, hires a brokerage firm or investment bank to advise them and handle the sale of those shares. The folks who get to invest in the IPO shares are the bigger, more active clients of the companies running the IPO.
But this is not a private deal between firms. This is the resurrection of a company that, but for the help of the taxpayers, would not have even survived bankruptcy.
The US Treasury should have run this IPO the same way it issues bonds--buy allowing an auction. Big the right amount, ya get shares. Too little, you miss out. Too much and you overpay. But everyone who wants In on the deal would have a fair shot.
Now, though, you're only shot at the IPO is to be a big client of a big firm that the government and GM have selected. Nice if you are a zillionaire, I reckon.
Ordinarily, this is fine. A company wants to issue publicly traded shares of its stock, hires a brokerage firm or investment bank to advise them and handle the sale of those shares. The folks who get to invest in the IPO shares are the bigger, more active clients of the companies running the IPO.
But this is not a private deal between firms. This is the resurrection of a company that, but for the help of the taxpayers, would not have even survived bankruptcy.
The US Treasury should have run this IPO the same way it issues bonds--buy allowing an auction. Big the right amount, ya get shares. Too little, you miss out. Too much and you overpay. But everyone who wants In on the deal would have a fair shot.
Now, though, you're only shot at the IPO is to be a big client of a big firm that the government and GM have selected. Nice if you are a zillionaire, I reckon.
Monday, November 15, 2010
10 Market Bubbles To Monitor
Here is another item that I think is worth just cutting/pasting. So much for blogging this month, but I do want to share keen and interesting insight:
10 Market Bubbles That Could Soon Burst
By Charles Wallace (via www.RealClearMarkets.com)
* Weak Start for Amazon
* Lowe's Prepares for Hibernation
* Don't Force It
* Go With Geithner on the GM Deal
* TJX Preview: Managing Expectations
The president of the Minneapolis Federal Reserve, Navayana Kocherlakota, recently published a paper in which he argues that government guarantees helped fuel the bubble in real estate. While his paper was largely aimed at prescribing solutions to this problem, it raises the question: What other bubbles are lurking out there in the global economy? We asked several experts and to our surprise, they had a long list:
1. Gold: The price of gold bullion has risen from $294 an ounce in 1998 to $1,404 last week, an increase of 377%. "It's the biggest, baddest bubble of them all," says Robert Wiedemer, author of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown. Gold has no intrinsic value. A telltale indicator that gold is a bubble: incessant cocktail party chatter about buying gold and endless TV commercials offering to buy gold jewelry. The SPDR Gold Trust(GLD) ETF is up 28% since the beginning of the year.
2. Real estate in China: Chinese real estate prices are up only 9.1% this year, which may seem more frothy than bubbly. But rising prices are generating rising demand, which is a clear sign of a bubble, says Vikram Mansharamani, whose book, Boombustology: Spotting Financial Bubbles Before They Burst, will be published early next year. The participation of amateur investors like waiters and maids in the property boom is a clear sign of a property bubble in China. The fact that developers are building more apartments than there are buyers is another giveaway.
3. Alternative energy: Solar technology is still uneconomic, yet governments all over the world are subsidizing solar energy firms. "There are plenty of people who shouldn't be in the solar energy industry who are," says Mansharamani. Do we really need 250 venture-capital-backed solar cell companies? The Market Sectors Solar Energy(KWT) ETF had a 100% gain this year, before dropping back.
4. Commodities: Blame it on the weather, China or the Fed, but commodities have shot higher in recent months. Wheat is up 60% this year, and other food commodities like corn have also risen dramatically. "The focus is on the food category for bubbles," says Wiedemer, but industrial metals like copper are also very frothy.
5. Apple(AAPL): OK, everybody loves their iPad and iPhone (except if they live in New York or San Francisco, where signal strength is a problem). But Apple shares are up 1,200% since 2001, which has to come close to being the definition of a bubble. "Apple is a high-fashion company," says Wiedemer. "If CEO Steve Jobs either leaves or dies, I think they will have trouble maintaining that incredible fashion sense, and as such it's time will go," he says.
6. Social networking: Sure, Facebook has 500 million members, but what is that worth? Some estimates put the company's market value as high as $35 billion, but shares in these social networking companies are not listed and are so far only traded by a few insiders. Twitter, with almost no income, is said to be worth $1.5 billion, and LinkedIn is also estimated to be trading at a market value of $1.4 billion. "There aren't any anchors or valuation methods to guide investors in terms of valuation," says Mansharamani. "When you have that lack of clarity, almost anything is possible." Many in the tech world try to figure out what these companies might be worth some day far in the future and then discount that back to some reasonable price today. Remember Boo.com?
7. Emerging market stocks: As an asset class, these shares have risen 146% in the past two years. "We're only halfway along the way to a gigantic eventual bubble in the emerging markets," says Barton Biggs, the former Morgan Stanley Asset Management chairman who accurately predicted the U.S. stock market bubble in the late 1990s. These countries, such as Indonesia, Australia, Russia and Brazil, are growing wildly even though there's no growth in the world economy. Much of their gains is backed by commodity prices, which are also a bubble (see item No. 4). "I have every reason to believe this will turn into a bubble," says Mansharamani.
8. Small tech companies: It's only been a decade since the tech bubble burst, but cash-rich large tech companies are gobbling up smaller firms without regard to price. For example, Hewlett-Packard(HPQ) got into a bidding war with Dell(DELL) over computer storage company 3Par and ended up paying a whopping $2.4 billion, 325 times the firm's earnings before interest, taxes, depreciation and amortization.
9. The U.S. dollar: Although the dollar is down 10% against the euro so far this year, Wiedemer believes the greenback is firmly in bubble territory. He believes it will pop when foreigners stop buying U.S. assets such as stocks and bonds. "Foreigners say, 'I'm worried about inflation -- you're going to pay me back in dollars worth less than when I invested'." While China may hold its dollar bonds forever, he says, pension funds in Japan and insurance companies in Europe will start dumping dollars as U.S. inflation climbs.
10. U.S. government debt: "When this bubble pops you're out of bubbles -- nothing is too big to fail any more," says Wiedemer. The debt bubble is growing very rapidly and will continue to grow, he says. Basically, there's no way the U.S. government can ever pay back the $13.7 trillion it currently owes (mainly to foreigners), and eventually they will stop buying. The bubble pops when the government has trouble selling its debt -- just like Ireland and Greece are experiencing at the moment. Instead of borrowing money, the government starts printing money, which is what's happening now. The Fed's balance sheet has gone from $800 billion in 2008 to $2.2 trillion, and the central bank just announced it was printing another $600 billion. Says Wiedemer: "The medicine starts to become poison."
10 Market Bubbles That Could Soon Burst
By Charles Wallace (via www.RealClearMarkets.com)
* Weak Start for Amazon
* Lowe's Prepares for Hibernation
* Don't Force It
* Go With Geithner on the GM Deal
* TJX Preview: Managing Expectations
The president of the Minneapolis Federal Reserve, Navayana Kocherlakota, recently published a paper in which he argues that government guarantees helped fuel the bubble in real estate. While his paper was largely aimed at prescribing solutions to this problem, it raises the question: What other bubbles are lurking out there in the global economy? We asked several experts and to our surprise, they had a long list:
1. Gold: The price of gold bullion has risen from $294 an ounce in 1998 to $1,404 last week, an increase of 377%. "It's the biggest, baddest bubble of them all," says Robert Wiedemer, author of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown. Gold has no intrinsic value. A telltale indicator that gold is a bubble: incessant cocktail party chatter about buying gold and endless TV commercials offering to buy gold jewelry. The SPDR Gold Trust(GLD) ETF is up 28% since the beginning of the year.
2. Real estate in China: Chinese real estate prices are up only 9.1% this year, which may seem more frothy than bubbly. But rising prices are generating rising demand, which is a clear sign of a bubble, says Vikram Mansharamani, whose book, Boombustology: Spotting Financial Bubbles Before They Burst, will be published early next year. The participation of amateur investors like waiters and maids in the property boom is a clear sign of a property bubble in China. The fact that developers are building more apartments than there are buyers is another giveaway.
3. Alternative energy: Solar technology is still uneconomic, yet governments all over the world are subsidizing solar energy firms. "There are plenty of people who shouldn't be in the solar energy industry who are," says Mansharamani. Do we really need 250 venture-capital-backed solar cell companies? The Market Sectors Solar Energy(KWT) ETF had a 100% gain this year, before dropping back.
4. Commodities: Blame it on the weather, China or the Fed, but commodities have shot higher in recent months. Wheat is up 60% this year, and other food commodities like corn have also risen dramatically. "The focus is on the food category for bubbles," says Wiedemer, but industrial metals like copper are also very frothy.
5. Apple(AAPL): OK, everybody loves their iPad and iPhone (except if they live in New York or San Francisco, where signal strength is a problem). But Apple shares are up 1,200% since 2001, which has to come close to being the definition of a bubble. "Apple is a high-fashion company," says Wiedemer. "If CEO Steve Jobs either leaves or dies, I think they will have trouble maintaining that incredible fashion sense, and as such it's time will go," he says.
6. Social networking: Sure, Facebook has 500 million members, but what is that worth? Some estimates put the company's market value as high as $35 billion, but shares in these social networking companies are not listed and are so far only traded by a few insiders. Twitter, with almost no income, is said to be worth $1.5 billion, and LinkedIn is also estimated to be trading at a market value of $1.4 billion. "There aren't any anchors or valuation methods to guide investors in terms of valuation," says Mansharamani. "When you have that lack of clarity, almost anything is possible." Many in the tech world try to figure out what these companies might be worth some day far in the future and then discount that back to some reasonable price today. Remember Boo.com?
7. Emerging market stocks: As an asset class, these shares have risen 146% in the past two years. "We're only halfway along the way to a gigantic eventual bubble in the emerging markets," says Barton Biggs, the former Morgan Stanley Asset Management chairman who accurately predicted the U.S. stock market bubble in the late 1990s. These countries, such as Indonesia, Australia, Russia and Brazil, are growing wildly even though there's no growth in the world economy. Much of their gains is backed by commodity prices, which are also a bubble (see item No. 4). "I have every reason to believe this will turn into a bubble," says Mansharamani.
8. Small tech companies: It's only been a decade since the tech bubble burst, but cash-rich large tech companies are gobbling up smaller firms without regard to price. For example, Hewlett-Packard(HPQ) got into a bidding war with Dell(DELL) over computer storage company 3Par and ended up paying a whopping $2.4 billion, 325 times the firm's earnings before interest, taxes, depreciation and amortization.
9. The U.S. dollar: Although the dollar is down 10% against the euro so far this year, Wiedemer believes the greenback is firmly in bubble territory. He believes it will pop when foreigners stop buying U.S. assets such as stocks and bonds. "Foreigners say, 'I'm worried about inflation -- you're going to pay me back in dollars worth less than when I invested'." While China may hold its dollar bonds forever, he says, pension funds in Japan and insurance companies in Europe will start dumping dollars as U.S. inflation climbs.
10. U.S. government debt: "When this bubble pops you're out of bubbles -- nothing is too big to fail any more," says Wiedemer. The debt bubble is growing very rapidly and will continue to grow, he says. Basically, there's no way the U.S. government can ever pay back the $13.7 trillion it currently owes (mainly to foreigners), and eventually they will stop buying. The bubble pops when the government has trouble selling its debt -- just like Ireland and Greece are experiencing at the moment. Instead of borrowing money, the government starts printing money, which is what's happening now. The Fed's balance sheet has gone from $800 billion in 2008 to $2.2 trillion, and the central bank just announced it was printing another $600 billion. Says Wiedemer: "The medicine starts to become poison."
Sunday, November 7, 2010
Seven Biggest Mistakes Mutual Fund Investors Make
This such good advice I am simply cutting & pasting it right from the Charles Schwab web site:
The 7 biggest mistakes fund investors make
1:02 pm ET 11/07/2010 - MarketWatch Databased News
Editor's note: Chuck Jaffe is off this week. MarketWatch is presenting one of his favorite archived columns.
BOSTON (MarketWatch) -- There's a difference between trying to do the right thing and actually getting it done.The biggest mistakes mutual-fund investors make fall right in the middle, where an investor trips over the fine line that separates good investing habits from bad.
In talking to financial experts and fund specialists, as well as reviewing industry statistics about ownership and asset flows, it's clear that the investing public keeps trying to do the right thing, it just doesn't always get the best results.
Here are the seven biggest mistakes fund investors make. If they describe the way you have been investing, it might be time to check your portfolio -- and your mindset:
1. Chasing returns: Buying what's been hot makes intuitive sense -- you're riding the express train -- but all too often results in disappointment. Ideally, the idea is as simple as "buy low, sell high," but investors who chase performance typically are late to whatever market sector or investment style is hot. As a result, they buy at high prices, and when the market turns and starts to favor something else, these investors then sell low.
2. Rearview-mirror investing: It's hard to go forward when you are only looking backwards. This problem is related to performance-chasing. You can't just buy funds that did reasonably well in the past; you need to invest in parts of the market that are likely to do well going forward. Too many investors know what a fund has done recently but have little idea of the fund's prospects.
3. Overreliance on rankings and ratings: More than 90% of all new money into mutual funds go to issues that carry Morningstar's four- and five-star rating. Yet the investment research firm is quick to note that its star system is more "descriptive" than "predictive."
There is nothing wrong with buying only funds that do well according to stars, numbers or any system, but make sure the fund adds diversification and strategy to your portfolio, rather than bringing only a past that was good enough to earn a top grade,
4. Assuming you can buy and hold a fund forever: Funds change, markets change, people change; what's appropriate to buy at one point in your life may not be right later. Yet too many investors are married to their funds, hanging on in sickness and health, for richer or poorer, rather than always considering whether they would still buy the fund today. If key buying factors change -- everything from the manager, the asset class, costs and track record and ratings -- you shouldn't blindly stay put Read about bad mutual funds and the investors who love them..
5. Failing to understand what the fund does, how it invests or what it buys: When investors are surprised by a fund's lagging performance, it's often because they never clearly understood the fund's objective.
Too many investors can't explain what their funds do and why. They may know they own a large-cap growth fund or an index fund, and they'll review the ratings and performance, but when it comes to the nuts and bolts, they don't know where to start.
For example, a mutual fund is considered "diversified" once it has more than 16 stocks, but it can still be concentrated or focused in a certain market sector. Likewise, investors who buy funds that top the charts don't necessarily know what those funds did to stand out from the pack.
6. Letting emotions rule: It's hard to prove a system or stick to a discipline if you make changes on a whim or with every market hiccup. There's a natural human tendency to let the most recent experiences color judgment; as a result, investors typically give too much significance to current events and expect that trend to continue. Wanting to cash in on those trends or protect against them, they'll let fear or greed rule the day and invest with emotion rather than intellect.
7. Focus too much on a fund, and not enough on the portfolio: Finding good funds isn't that hard; putting them together in an effective, low-maintenance, diversified portfolio is a lot more difficult. Too many investors have a collection of funds, rather than a strategic portfolio, where every fund has a role and every new addition is evaluated not just on its own merits, but on what it adds to the big picture.
Owning five or 10 mutual funds does not make an investor diversified if most of those issues reflect one or two asset classes. Investors need more than a "good" fund; they need funds that enhance their holdings, diversify risk, bring additional asset classes into play and help the portfolio achieve their goals over time.
The 7 biggest mistakes fund investors make
1:02 pm ET 11/07/2010 - MarketWatch Databased News
Editor's note: Chuck Jaffe is off this week. MarketWatch is presenting one of his favorite archived columns.
BOSTON (MarketWatch) -- There's a difference between trying to do the right thing and actually getting it done.The biggest mistakes mutual-fund investors make fall right in the middle, where an investor trips over the fine line that separates good investing habits from bad.
In talking to financial experts and fund specialists, as well as reviewing industry statistics about ownership and asset flows, it's clear that the investing public keeps trying to do the right thing, it just doesn't always get the best results.
Here are the seven biggest mistakes fund investors make. If they describe the way you have been investing, it might be time to check your portfolio -- and your mindset:
1. Chasing returns: Buying what's been hot makes intuitive sense -- you're riding the express train -- but all too often results in disappointment. Ideally, the idea is as simple as "buy low, sell high," but investors who chase performance typically are late to whatever market sector or investment style is hot. As a result, they buy at high prices, and when the market turns and starts to favor something else, these investors then sell low.
2. Rearview-mirror investing: It's hard to go forward when you are only looking backwards. This problem is related to performance-chasing. You can't just buy funds that did reasonably well in the past; you need to invest in parts of the market that are likely to do well going forward. Too many investors know what a fund has done recently but have little idea of the fund's prospects.
3. Overreliance on rankings and ratings: More than 90% of all new money into mutual funds go to issues that carry Morningstar's four- and five-star rating. Yet the investment research firm is quick to note that its star system is more "descriptive" than "predictive."
There is nothing wrong with buying only funds that do well according to stars, numbers or any system, but make sure the fund adds diversification and strategy to your portfolio, rather than bringing only a past that was good enough to earn a top grade,
4. Assuming you can buy and hold a fund forever: Funds change, markets change, people change; what's appropriate to buy at one point in your life may not be right later. Yet too many investors are married to their funds, hanging on in sickness and health, for richer or poorer, rather than always considering whether they would still buy the fund today. If key buying factors change -- everything from the manager, the asset class, costs and track record and ratings -- you shouldn't blindly stay put Read about bad mutual funds and the investors who love them..
5. Failing to understand what the fund does, how it invests or what it buys: When investors are surprised by a fund's lagging performance, it's often because they never clearly understood the fund's objective.
Too many investors can't explain what their funds do and why. They may know they own a large-cap growth fund or an index fund, and they'll review the ratings and performance, but when it comes to the nuts and bolts, they don't know where to start.
For example, a mutual fund is considered "diversified" once it has more than 16 stocks, but it can still be concentrated or focused in a certain market sector. Likewise, investors who buy funds that top the charts don't necessarily know what those funds did to stand out from the pack.
6. Letting emotions rule: It's hard to prove a system or stick to a discipline if you make changes on a whim or with every market hiccup. There's a natural human tendency to let the most recent experiences color judgment; as a result, investors typically give too much significance to current events and expect that trend to continue. Wanting to cash in on those trends or protect against them, they'll let fear or greed rule the day and invest with emotion rather than intellect.
7. Focus too much on a fund, and not enough on the portfolio: Finding good funds isn't that hard; putting them together in an effective, low-maintenance, diversified portfolio is a lot more difficult. Too many investors have a collection of funds, rather than a strategic portfolio, where every fund has a role and every new addition is evaluated not just on its own merits, but on what it adds to the big picture.
Owning five or 10 mutual funds does not make an investor diversified if most of those issues reflect one or two asset classes. Investors need more than a "good" fund; they need funds that enhance their holdings, diversify risk, bring additional asset classes into play and help the portfolio achieve their goals over time.
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