In this Expert Insight Interview, Michael Prendergast discusses common investment mistakes. Michael Prendergast is a Director and Advisor at Altfest. He helps clients with all aspects of investment and personal financial planning matters.
This Expert Insight Interview discusses:
- The phenomenon of recency bias and how it dictates many people’s decisions
- How to avoid rearview mirror investing
- Why it is crucial to diversify your portfolio
With COVID and the Russian invasion of Ukraine, there is so much investment panic. In fact, people had been panicked about investing even before these crises, so many people, especially casual investors, are confused about what they should do right now.
There’s this phenomenon called “recency bias,” whereby people tend to think that what has happened recently will continue to happen. However, it is essential to remember your goals for your portfolio. For example, if you’re saving up for retirement, it doesn’t make much sense to radically change your portfolio based on a short-term event, which would disrupt your chances of reaching a long-term goal.
Rearview Mirror Investing
One of the mistakes you should try to avoid when you’re starting in investment is “rearview mirror investing.” Often people take a look at their portfolio at the end of the year and get rid of the things that didn’t do very well while buying more of the things that did well.
This makes sense if you assume that the winners will keep winning and the losers will keep losing, but as we know, change is the only constant thing. The winners will not be winning forever, and the losers will not be losing forever. What you want is to have a highly diversified portfolio.
Concentration vs. Diversification
For a beginner or casual investor, it is imperative to understand the power of diversification. Instead of a portfolio concentrated on U.S. large-size stocks, aspiring investors should diversify their portfolios as much as possible.
This means having different types of stocks of various sizes, nationalities, value stocks vs. growth stocks, treasury bonds, corporate bonds, mortgage-backed securities, inflation protection securities, alternative investments like real estate, precious metals, infrastructure funds, etc.
John is the Amazon bestselling author of Winning the Battle for Sales: Lessons on Closing Every Deal from the World’s Greatest Military Victories and Social Upheaval: How to Win at Social Selling. A globally acknowledged Sales & Marketing thought leader, speaker, and strategist. He is CSMO at Pipeliner CRM. In his spare time, John is an avid Martial Artist.