Eleven Issues Facing Investors Part 1 (Issues 1-5)

A prospective client sat with me over the weekend to review one of his smaller portfolios, which had been run by a broker friend of his for many years.??? This diagnostic part of the job allows me to get excellent insight into how investors think, as well as to look at what products people put into these portfolios.?? I’ve looked at many of these over the years and can say there are eleven things I identify:

1.????? Overdiversified

There are too many mutual funds, ETFs in the mix.?? Low-cost index funds, few in number, are likely sufficient for most who don’t want to do it themselves.? “De-worse-ification” is one of my favorite descriptions of what actually takes place.

2.????? Long Only

Over time, being long is the only appropriate course of action (you’ll be bankrupt betting against the stock market or America, the saying goes), but very few investors use tools to hedge.

3.????? Don’t know what they own!

See point 1.? If you’re overdiversified, you cannot possibly have an idea what you really own.? Exposure to the future of US earnings power can be accomplished with an S&P500 index fund.

4.????? Trade too much

Many falls prey to this.??? The typical investor (professionals as well) overtrades accounts.?? These days, that comes with small frictional cost—I’m old enough to remember paying “an eighth”, or 12.5 cents per share to brokers to go in and out.??? Renting stocks, unless you’re good at short term trading (few are), can drive you crazy and/or diminish your net worth.

5.????? Worry about tax losses at the risk of margin of safety.

A stock surpasses your target, appreciating far beyond fair value over a long period of time.? You say it’s “expensive”, you know it’s got no margin of safety, but you want to avoid paying capital gains taxes.?

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Stay tuned for points 6-11.

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