If you're an investor and want to build -- not destroy -- your nest egg, then you should avoid doing the following things with your portfolio. In fact, these things are so destructive that we're calling them the seven deadly sins. You've been warned.
1. Trading on Margin
"But if i can borrow at..." Let me stop you right there. I'm sure fortunes have been made using margin, but I suspect many more have been lost. Ask the geniuses who bought master limited partnerships on margin on the theory they could merely pocket the spread between the borrow rate and yield of the MLP and still make money. Spoiler alert! It did not go well.
2. Trading Weekly Options
This lovely investment tool has been brought to us since the financial crisis and my theory is that it's a way for brokers to pocket some cash since they're getting nothing for the deposits at their institutions. Why not juice fees and commissions? I can't blame them. It doesn't mean we need to participate. The next time you run into someone who regularly makes a "killing" trading weekly options, let me know. I'm sure they clean up at Caribbean stud poker at the Bellagio in Las Vegas, too. I can't wait to hear all about it.
3. Trading on an Unrealized Gain/Loss
It's impossible not to know how much you are up and down on a particular stock or investment, but I promise you all of us would be better off not knowing and would make better long-term decisions if we were not concerned with the amount of a gain or loss. Remove this from your screen if you can. At least make yourself work to find it. It's not where a stock has been, it's where it's going after all right?
4. Stepping Outside Your Comfort Zone
My worst trade ever? Vale (VALE) . I lost 50%, in an IRA no less. What's worse, I probably dealt with it with for more than a year. The fancy term for this is "opportunity cost." Whatever, it was a waste of time. Let me now detail for you what I know about iron ore and the Brazilian economy. O.K., I'm done. Let's move on.
5. Having Fun with Punditry
You know what the 500 in S&P 500 stands for right? There's no way one person knows everything there is to know about 500 individual stocks, not to mention the countless others outside that index. It's entirely possible that you know more about one of your stocks than someone who gets handed a segment breakout a few hours before appearing on TV. Don't trade off one person saying one thing on TV or noting that the index struggles at some meaningful technical level. They may not even be good at reading charts. Do your work, take all information for what it is, information.
6. Not Reinvesting Your Dividends Before Retirement
I'm sure there's a good reason to take your dividends in cash from stocks before you reach retirement, but I've yet to hear it. "Oh, I'll just hold on to the cash and wait for a pullback before buying." Good luck with that. Next you'll be telling me you're timing the market by not reinvesting your index fund dividends and waiting for lower prices. Embrace compounding, it's the best friend of the long-term investor. Don't overthink this.
7. Being Cash Poor
Inevitably, when the market pulls back you hear from the experts, "Now is the time to raise cash." Wasn't the time to raise cash when prices were higher? The point is you should always be raising cash or have at least 10% of your portfolio in cash. This can be done by periodically selling pieces of positions, rebalancing, or my favorite, saving some cash from your monthly cash flow and building the overall balance of your brokerage account. I've done some research on this, and you can in fact not spend every dollar you make in any given month. In today's market I like to have at least 20% cash in my taxable accounts, at least, so if we get an Aug. 24 situation of last year or action like we had earlier this month, I can pounce.
While you won't actually die if you fall victim to one of these sins, doing so over and over again will have a negative effect on your returns. I can guarantee you that. Good luck out there.