Avoid These Five Common Portfolio Mistakes
One of the things I like most about writing for
RealMoney is the dialogue I have with readers. They send me all sorts of interesting comments and opinions, and in return, they get inside the head of an active money manager, one whose opinions are outside the mainstream -- or should I say
maelstrom -- that is Wall Street.
I have to ask my readers to forgive me on this one, though: Sometimes I use your emails as a contrary indicator. When I
Mistake No. 1: Going to cashI get lots of emails from people who are fully invested in cash. I know that many market pundits are in cash as well. In terms of basic investing philosophy, I disagree with this position. While I understand the need for a reasonable amount of cash in a portfolio, I'd rather purchase undervalued businesses that generate free-cash-flow yields well above the 2% yield that money market funds earn. Several of the companies that I've highlighted for RealMoney readers fit the bill, such as Liz Claiborne (LIZ), Ethan Allen (ETH) and Raymond James Financial (RJF).
Mistake No. 2: Owning an S&P index fundI know this market is tough, but don't make the mistake of socking your money away in an S&P 500 index fund and forgetting about it. This cycle is all about selectivity. You can make a buck or two if you're in the right companies at the right price. But buying into a broad-based fund that's excessively exposed to overvalued big-cap growth -- like S&P index funds -- is a prescription for mediocrity at best and for substantial capital losses at worst.
Mistake No. 3: Owning companies with suspect managementThere are enough compelling ideas in this market to warrant eliminating companies with suspect management. I've warned investors in blunt terms -- in a column
Mistake No. 4: Owning companies with phantom earningsThere's no reason to own companies that produce low-quality, suspect earnings. The last cycle was marked by the unreal; this cycle is about
Include gains in net income, like
Mistake No. 5: Not following your money managersMistakes are part of the game in investing. If you're unwilling to make a mistake, then don't invest. But money managers make some mistakes that are difficult to sanction -- mistakes of ineptitude or laziness. Take a look at the stocks in the portfolio of your mutual fund for the past few months. It will tell you a lot about how your money manager thinks and how he or she approaches a difficult market.
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