Subscribe

The most common investment mistake

A diversified portfolio, while not a panacea, is still a wise choice. Don't give up too early on an asset class after a downturn. 

  • close
    Traders work on the floor of the New York Stock Exchange. A common investing mistake is giving up an on asset class before it rebounds.
    Richard Drew/AP/File
    View Caption
  • About video ads
    View Caption
of

In 2014, the S&P 500 returned 13.69% with dividends reinvested. Meanwhile, many diversified investors earned substantially less than that, due to falling commodity prices and poor international stock market returns after adjusting for the strong dollar.

Some of these investors were extremely disappointed by their underperformance. Many drew the conclusion that it was time to change course and adjust for the reality that U.S. stocks are best. After all, if the S&P 500 has beaten almost every other asset class over the past three years, why invest in anything else?

That was the exact wrong conclusion, and it stems from a very common investment mistake.

The most common investment mistake we see is an investor bailing when one asset class does poorly. Usually, the result is that the asset class the investor abandoned ends up rebounding, and the one that did well — and which the investor eagerly jumped into — isn’t as strong the following year, leaving the investor frustrated once again.

This illustrates the whole idea of diversification, and the whole point of sticking it out for the long term. Nobody can predict which asset class will perform best next year.

Let’s make one thing clear: A diversified portfolio is not a silver bullet. There will be times that a diversified portfolio, which includes international holdings, will perform poorly compared with the U.S. stock market. This investment truth should not deter you from staying diversified.

Late last year, we had several clients suggest we should sell all our international holdings given their poor performance relative to the U.S. over the course of 2014. Guess which asset class has been one of the best so far in 2015 — international stocks.

I remember one client complaining about a particular mutual fund we owned and how terrible the fund’s performance once. In fact, the fund was in the top 10% of its peer group. It was actually the asset class the client was complaining about, since all funds in that class were down in 2014.

Lesson: Be careful not to give up on an asset class right before it turns around.

The Christian Science Monitor has assembled a diverse group of the best personal finance bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

About these ads
Sponsored Content by LockerDome
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK