Episode 7: Common Mistakes that Investors Make

ABOUT THIS EPISODE

On this episode of the Build Your Life Podcast with Financial Expert John Browning we're chatting about common mistakes that investors make. 

Tune in to hear about the top two mistakes that are most common and why this happens so easily in today's world despite all the information that's available. Don't make assumptions about what you should or shouldn't do...let John help you avoid these pitfalls. 

For more information, visit www.GuardianRockWealth.com to learn more about what John can do for you.

Welcome to the building your life podcast with John Browning. Building your life as a relaxed and unedited conversation with financial expert John Browning. Well, Gon, how are you doing today? Star, doing great, and how are you? I am very well. That's a beautiful day. Spring has sprong and things are great. So always good to beat with you again and talk all things financial. So we want to get into some talk talk today really about some common mistakes that people make, and I'm sure that you get, you've seen over your career. Just so some basic mistakes that people make as they're planning their their investments, their life, putting together their portfolio. What would you say? Can you give us some example, John, of a couple common mistakes that people typically make? Yeah, there's there's actually there's a there's a lot of them, so nary. Narrowing that down to two is a little bit of a challenge, but I would say the most common the that...

...we see is either to oversimplify or over complicates, and I put that in kind of the same category. Huh, and people who oversimplify the process the ideas well, I'll just buy the index and I'll close my eyes and go away and things will turn out in the end right. And the ones who overcome complicate the process try and, in addition to their own job that they have, you know, nine hundred twenty five or sometimes, you know, much longer than that, in addition to that, they try and figure out all of the different items that are going on in the market place. That, frankly, I can't do, and I do this full time. And they overcomplicate the process and end up with overwhelm or simply making mistakes. And it's not that they're they're not smart or brilliant with what they do. It's just that there's just simply not possible in a complex, adaptive market that is...

...our economy. So, though, that's that's probably the most common two things that we see. And for an I put those in the same category. For a second one, it would definitely be just simply ignoring the issue head in the sand. Yes, I'm sure it'll all work out. This is not an urgent problem. It might be an important problem, but it's not urgent right now. I'd rather buy that new car or I'd rather do go on that vacation or whatever. Yeah, yeah, and as a great point, because we are people who love impulse buys and we love. We are people typically that like an emotional feel of yeah, a new car, vacation or something, because that's an immediate gratification. Putting money aside for the next thirty or forty years that's that's not real immediate. So how do you help people overcome that emotional aspect of it and deal with some practicality of what we really do need to be to be saving? How do you help people walk through that? Well, I think ignoring the idea that it isn't a there...

...is an emotional aspect of it is another mistake, frankly, and and it's one that a lot of frankly professional investors make. And there was a big movement maybe ten fifteen years ago called quantitative investing, and it's a fantastic idea. I love the theory and I actually use it, but I don't use it to the exclusion of all else. And the idea behind it is that you take the emotion out of investing. And you'll still hear that today. You should take all emotion out of investing. The problem with that is it is it's an emotional market. I've say, and I'm an emotional person right that's right. That's right, and you're seeing that right now in particular, and this is going to date this podcast, but but we're dealing with the coronavirus and on top of that, to pile on, there's a there's a oil price war, which was got to be the worst time in the world...

...for that to happen, because you already had oil prices depressed because of the coronavirus and and the lack of travel, you know, countries shutting down their borders, airports shutting down and people just traveling less. And then you've got an oil price war between Saudi Arabia and the Russians and it's just driving down the price of oil, which has follow on effects all over the globe with many industries absolutely well, let's pause it for just saying because you're right, we're in the midst of March, two thousand and twenty. Coronavirus is rampant right now. People are canceling vacations. I just talked to a client earlier day who knew somebody, a salesman for a big company, who had three trips plan and this guy sells, you know, million dollar equipment to doctors and hospitals three trips canceled and you start thinking about the fears and what that could do to the stock market and things, and that's an emotional idea, right. We're hearing from the news all this doom and gloom and people are scared. How's that play out to somebody WHO's invested in the market? What's...

...their typical response that? Because that is an emotional response, right, that's right. And and your typical investor, now, I mean many of them have been sort of I'll call a trained to, not pianic, but but we're seeing just a lot of panic and that that's a parent in as you watch the prices move downward at a more rapid piece than we have seen in the history of the stock market, including in the s. We did not see it go down this fast. And there's just panic out there and it is not helped by, you know, entire government's piano as well. And I don't want to make light of the problem. It is a major issue and and it's a horrible thing that's that's happening. But one of the things that were also seeing, I believe, and it ties in with that first...

...thing about oversimplifying the process, is so many folks just piled into the index because that was easy, and we like easy, right. Like easy, sample free, we like those things, and the index is essentially gotten down to it. It's free and it's easy and investors, some investors, just think that's the way to go. But by definition you're buying a lot of subpart stocks and you're, by definition, relegating yourself to average. Never have gotten up out of bed. I want to be average today, but that's what you're doing when you oversimplify the issue and when everybody goes into the same group of stocks, when they get out and they panic, they're exiting the exact same group of stocks, whether they're great stocks or whether they're really not so great stocks, and so everybody kind of gets gets punished all I want right. That's part of the increased volatility right now. Well, and here's...

...something I guess I want to just throw in for people like you, John. You know, it's too easy for US investors to listen to the media in an in a crisis like this or any crisis, and to take our cues from the media versus calling our financial advisor like you and say, okay, John, what your take? What's going on? Because you you should have a better overall view of the markets and and really what's going on to help calm my fears. So I think part of what is striking me as I'm hearing you, is we need to make sure that we have a financial professional like yourself who's helping us build our portfolio and we have communication with you in times like this, that I'm not watching the media and taking my cues from them, but I'm calling you at the same time going okay, John, what's going on, and hopefully you're communicating as well out to your constituents. Right. So talk to me a little bit about the communication aspect that that helps deal with the fears the people have, are the emotional ups and...

...downs, roller coasters that we have. When we have a stable voice, a voice of reason, let me call you, to call and say, okay, John, what's going on, what do you take? What do you meet? What's this mean, John? Well, the media gets paid more for sensationalism. They sell more ad space, more people watch and the more sensational it is. And unfortunately, as we've seen in away from the investing side of things, negativity, yeah, sells, and so that sells media space and add space. So that's what you're going to hear more of if you listen to the MEA, and you'll get the occasional, you know, positive story. You know, keep calm, this too shall pass you. You'll get that as well. But the the what we do is we look at the entire picture and, frankly, right now is when the portion of your portfolio, and you should have a portion of your portfolio. Almost...

...anyone should have a portion of their portfolio that is actually appreciating rather than depreciating at markets like this, or at least staying stable, and when that happens, then your your balance and your portfolio gets out of wax. So you rebalance, and what that means is you're actually starting to buy equities right now while they're going down. But as you saw in the two thousand and seven, two thousand and eight, just to bring it back to the most recent issue, that we had, the largest outflow from the equity market happened at the very bottom of the market. So what that means is most people, most investors, were selling out of their position at the very bottom of the market, which is obviously the exact opposite of what you should have been doing at that point in time. But people begin to get fearful and it's very difficult to buy or even start buying in a market environment like we're in today. Yet it's exactly what you should start to do. I'm not saying you...

...put you know everything. You have to work today, because we could go down further and and frankly, we don't know. That's right. Yeah, I remember growing up on schoolhouse rock. I don't know if you remember that or on yeah, there was one of them. is like by low, sell high, get a piece of the Pie. That's always just stuck with me. So you're right, this is a an opportunity for most people to buy, knowing that, if we look back on history, the stock markets going to come back. You don't know when it might go lower, but you get in, and I think the whole deal is not handaking, calling your advisor, calling John, and saying, okay, what your take? Where should we go? What else is going on? You mentioned this a little bit ago. You didn't use this word, but you were talking about, you know, buying into to markets or certain portfolios and things. I want to talk about diversification and why diversification is important, and you just kind of mentioned because you said, you know, you should always have a portion of your portfolio that's actually rising or increasing or staying stable, maybe while other...

...parts are going down or some so explain diversification. How? What is that and how does that play into a proper portfolio? Well, diversification and acid allocation are often used interchangeably. Diversification really is talking about diversifying within an asset class. But does that mean? What does that mean? That's that's a what's a jargon thing? Yes, you're right. So. So, diversification within an asset class means that instead of buying a hundred percent of your portfolio in and say ibm or apple or something like that, that you buy a stock in apple, you buy a stock in Microsoft, you buy a stock, and these are not recommendations. You just want to make it clear by different stocks and different industries so that if one industry is going down the other one might be propping that one up, and if one company has really bad...

...news for whatever reason, you have other companies in there that would prop that up. That's diversification. Okay, all right. So when you talk asset class, you might be in my limited mind, you're talking, let's say stock so I could buy stock in a technology company, stock in a medical company, stock in an oil company. Those are different industry. So one may be going up or one maybe go down, but my asset class would be stocks. And in that world, is that? Am I getting that? That's correct. Okay, that's great, and you assume you would do that. The same thing and bonds or whatever, but you're putting different you got different buckets right now, putting all the gregs in one basket per se. Is that kind of that? That's exactly right. And Yeah, another asset classed here point is bonds or fixed income, and one of the again mistakes that people are, I think, are making today is the assumption that fixed income as an asset class will act in the same way that it did twenty or thirty years ago. And give it. It's really just more of...

...a a problem than anything else, given where rates are today, that fixed income is still very important to have as an asset class, but it's not likely to behave in the same way that it did, say, twenty, thirty or even ten years ago. So being aware of that and adjusting that asset class accordingly a super important as well. Now I get just dive in a little bit deeper. When you say fixed income as a cut, what would that be? Gi mean an example? So see bond of a say company or a Treasury Bond, US government security, okay, or you know, a big bank or something like that might issue a bond. So those would be fixed income. And okay, got up and that's something that we we might talk about on the next episode it because as I hear that, I think, wow, that might be a really safe investment. And as we go into the next episode we want to talk a little bit about risks and safety and why should I take a risk? When should I take a...

...risk? Right now might did the time to take a risk, to get in when it's wow and and something. So I want to talk about that more and more. But this episode really is dealing with emotions. I what an appropriate time for it to be here, with with what's going on in our economy, really the world risk and what is it and what types of risk should we be taking? And really talk about personality styles, because that plays into it as well. But we talked about on this one about emotions and the older coaster of emotions that investors can get on and really, I think, John, what what struck me the most is having somebody that I can call, somebody I can communicate with, like you. That's a an outside third party who has an interest in what I'm doing, but you can call me down. So I'm not listening and reacting to the media. I'm hearing that, but I'm also going to you and say, okay, you know my long term plan for life, and that's why I love your book d on build a life, not just a portfolio. It really helps balance everything out so we're not at responding in fear. Two things as we let's...

...wrap this one up. Let's talk, let's make a note and talk next episode about risk and when to take risks and how does different personality styles play into that? And I'll share a little bit about my story with my wife and where where we are riskwise. And I'm sure you had clients just like me, but how do you how do you play into that? So, John, thanks again for your time today. Great insights and I hope people do have a solid place to a turn and if you don't, you need to call John and let him help you build your life and your portfolio so you can live through with peace of mind through from ultras times like this and every other day. So thanks John. All right, thank you so thanks for listening to the building your life podcast was John Brownie. Be Sure to subscribe to this podcast so each new episode will be sent to you automatically when it is released. Have a terrific day.

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