Skip to footer

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. 

|
Richard Drew/AP/File
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.

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.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.
editor@csmonitor.com
Subscribe
Mark Sappenfield
Editor

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

Subscribe to insightful journalism

QR Code to The most common investment mistake
Read this article in
https://www.csmonitor.com/Business/Saving-Money/2015/0426/The-most-common-investment-mistake
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe