Most Common Investing Mistakes

Most Common Investing Mistakes

A recent conversation with the son of a client and a new college graduate prompted a question we decided to pose to all our advisors. We asked Charlie Fitzgerald, Ron Tamayo, Derrick Chandler, Mike Salmon, Tommy Lucas, Ryan Osborne, DJ Hunt, and Brad Brescia, all CFP® professionals, “What are the most common investing mistakes you’ve seen people make?”

The answers fell into three broad categories: market timing, concentrated risk, and behavioral errors.

Market-timing likely to fail

We’ve warned about market-timing many times and will again. Trying to move large portions of one’s holdings in or out of the market based on a forecast of how the market will behave in the near term has a terrible track record. The market-timing hall of fame is an empty room.

Sure, you may get it right but doing so just increases the chances you’ll try it again. Unfortunately, when you are wrong, the effects can be damaging and keep you from reaching your financial objectives.

Concentrated holdings are very risky

Concentrated risk is having too much money in one security. It is not about timing the market, but a big bet on your forecast about the behavior of that security and it is very risky. We see people taking on concentrated positions most often with employees owning too much of their employer’s stock or people who inherit large amounts of a particular stock. “It’s been good to the family and dad said to never sell it.” One problem is that on average, the price volatility of individual stocks is double that of the market.

…the price of an individual stock is not only subject to risks of the marketplace in general but is also subject to risks unique to that company…

This makes sense because the price of an individual stock is not only subject to risks of the marketplace in general but is also subject to risks unique to that company, as any Boeing shareholder will tell you. On January 6^, 2024, a door came off a Boeing 737 Max 9 at 16,000 feet during an Alaska Air flight. The stock dropped 20% in a matter of days. By March 25^th, the CEO had announced his resignation. All this while the market was reaching new highs.

Even worse than the odds of a superior outcome from a concentrated position is the effect when something goes wrong. At the extreme, the stock of an individual company can become worthless. A properly diversified portfolio cannot. If you have too much in one company and that stock tanks, it can be catastrophic to your financial security.

Behavioral investing mistakes

With low odds of success and potentially damaging outcomes, why do people market time or hold concentrated positions? Some of it is educational. People simply do not know how markets work. More often the reason is behavioral. A mistake is made because someone behaves in a way that goes against the evidence, usually for emotional reasons. They convince themselves that “this time is different.”

It goes something like this: a triggering event happens- it could be a hot stock tip or an idea from a friend or the media. The investor formulates an opinion that runs contrary to the evidence, and they lose touch with the plans they put in place when they were in a less emotional state. Instead of relying on the extraordinary track record of holding a broadly diversified array of stocks for long-term growth, they turn the goal into accurately predicting something else like the direction of the market in the coming months.

In the concentrated stock scenario, the triggering event is often the sticker shock of the tax bill that would arise if the holding were sold. The investor chooses not to sell and diversify and eventually the stock price drops significantly. Unfortunately, we’ve seen several cases where the price of a stock dropped, greatly reducing the taxable gain that was so unpalatable, yet the stock was still not sold – even though the risk of holding the stock was so clearly highlighted by the price drop. Why? The loss in value triggered an emotional response. Can’t sell when price is high. Can’t sell when price is down because it could recover.

In any case, holding a concentrated position is making a forecast not supported by evidence. Most individual stocks are more volatile than the market, so downturns are likely. Thousands of companies have stock prices that didn’t recover to prior highs. Being diversified is a much more reliable choice when the goal is financial security.

Similarly, when one bails out of the market after a downturn or fails to invest cash out of fear of a near term decline, they are very likely reacting emotionally to a trigger and speculating rather than investing. The key to overcoming this dynamic is planning and planning starts with purpose. Who and what is this money for and when is the money needed? The stock market is a risky place to put money you will spend in 2024 but an excellent choice for expenses you plan to incur in 2044. Have a plan. Invest, don’t speculate. Stay diversified, patient, and disciplined.

MFT named “Best Place to Work” for the 5^th time 

It’s true. We are very proud of our team and it is gratifying to see others recognize the work we do to maintain a great working environment. We have again been named to Investment News’ list of the top 75 best places to work for financial advisors in the U.S. That’s the fifth time since 2019. The process InvestmentNews and Best Companies Group used to determine the list included both information from firms about their offerings and practices and completion of an extensive anonymous employee survey.

Attention Business Owners

The Corporate Transparency Act (CTA) requires the disclosure of the beneficial ownership information (otherwise known as BOI) of certain entities from people who own or control a company. With potential penalties for willfully not complying with the reporting requirement of civil penalties of $500 per day (up to $10,000) and a felony offense with up to two years of jail time, this is a matter that requires attention. Entities in existence on January 1, 2024, must file with the Financial Crimes Enforcement Network (FINCEN) before January 1, 2025. Entities formed in 2024 have 90 days from registration to file.

We have been advised that our firm should refrain from assisting with filing for several reasons, including the unauthorized practice of law. You are not required to engage an attorney to file but if you want assistance, your corporate attorney is likely where you should start. Nonetheless, we can provide information from credible sources. The AICPA has an FAQ that covers the basics.

For more detailed information, including if a business is exempt from filing, the FINCEN website is the authoritative source. They offer a FAQ page – https://www.fincen.gov/boi-faqs, and a  Compliance Guide – https://www.fincen.gov/boi/small-entity-compliance-guide. You can file here – https://www.fincen.gov/boi.

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June 15

• Q2 estimated tax payment deadline
• Q2 estimated tax payment deadline for sole proprietorships, single-member LLCs, C-corporations, and multi-member LLCs that elect to be treated as a corporation

June 30

• Deadline to file Free Application for Federal Student Aid (FAFSA), for prior academic year

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Yours truly,

The Team at Moisand Fitzgerald Tamayo, LLC