Robert P. Seawright, the Chief Investment & Information Officer for Madison Avenue Securities, a broker-dealer and investment advisory firm headquartered in San Diego, California, provides a helpful list of investing errors and related maxims. Below are the top 10 from his list:
- Understand the “arithmetic of loss” (a 10% loss followed by a 10% gain does not get you back to even).
- Correlation is not causation; consensus is not truth; and what is conventional is rarely wisdom.
- High fees are a major drag on returns; tax advantages and consequences matter a lot too.
- All other things being equal, ETFs are better than mutual funds.
- Complex instruments, reaching for yield and illiquidity are usually more dangerous than they appear.
- Asset allocation is more important than the product selection of a portfolio’s component parts.
- Since passive management beats active management most of the time, it is the appropriate default.
- Be clear about and cognizant of what Barry Ritholtz calls the “long cycle” – secular and cyclical markets.
- Our psychological make-up and the behavioral biases and cognitive impairments caused thereby conspire against our investment success and even when we recognize these problems generally, we typically miss them in ourselves (“We have met the enemy and he is us” – Pogo).
- Forgetting that nobody is close to objective and that nearly everyone wants a piece of the action will cost you a lot of money.
To read Mr. Seawright’s full post, please see his Investing Checklist.