1. Investing in Something You Don’t Understand

One of the world’s most successful investors, Warren Buffett, cautions against investing in businesses you don’t understand. This means that you should not be buying stock in companies if you don’t understand what they do. Why is this important?  Because during periods when the stock is down, knowing what they do will give you the confidence to resist falling into the trap of panic selling.

2. Falling in Love with a Company

Too often, when we see a company we’ve invested in do well, it’s easy to fall in love with it and forget that we bought the stock as an investment. Remember: you bought this stock to make money. If any of the fundamentals that prompted you to buy into the company change, consider selling the stock.

3. Lack of Patience

A slow, steady and disciplined approach will go a lot farther over the long haul than going for the “Hail Mary” last-minute plays. Expecting our portfolios to do something other than what they’re designed to do is a recipe for disappointment. This means you need to keep your expectations realistic in regard to the length, time and growth that each stock will encounter.

4. Too Much Trading

Turnover, or jumping in and out of positions, is another return killer. Unless you’re an institutional investor with the benefit of low commission rates, the transaction costs can eat you alive – not to mention short-term tax rates and the opportunity cost of missing out on the long-term gains of good investments.

5. Market Timing

Successfully timing the market is extremely difficult to do. Even institutional investors often fail to do it successfully. A well-known study, “Determinants of Portfolio Performance” (Financial Analysts Journal, 1986), conducted by Gary P. Brinson, L. Randolph Hood and Gilbert Beebower covered U.S. pension-fund returns. This study showed that, on average, nearly 94% of the variation of returns over time was explained by the investment policy decision. In laymen’s terms, this indicates that, normally, most of a portfolio’s return can be explained by the percentage you allocate to stocks, bonds, and cash -  not by jumping in and out of the market, or by picking the right stocks.

6. Waiting to Get Even

Getting even is a trap that we’ve all fallen into at one time or another. This means you are waiting to sell a loser until it gets back to its original cost basis. Behavioral finance calls this a “cognitive error”. By failing to realize a loss, investors are actually losing in two ways: First, they avoid selling a loser, which may continue to slide until it’s worthless. Also, there’s the opportunity cost of what may be a better use for those investment dollars.

7. Failing to Diversify

While professional investors may be able to generate alpha, (beat the market averages) by investing in a few concentrated positions, non-professional investors should not try to do this. Stick to the principal of diversification. In building an ETF or mutual fund portfolio, remember to allocate an exposure to all major areas like stocks, bonds, cash, gold, etc

8. Letting your Emotions Rule the Process

Perhaps the No.1 killer of investment return is your emotions. The axiom that fear and greed rule the market is true. Do not let fear or greed overtake you. Focus on the bigger picture. Stock market returns may deviate wildly over a shorter time frame, but over the long term, historical returns for large cap stocks can average 10-11%. Realize that, over a long time horizon, your portfolio’s returns should not deviate much from those averages. In fact, you may benefit from the irrational decisions of other investors.

What You Can Do to Avoid these Mistakes

1. Develop a plan of action. Proactively determine where you are in the investment life cycle, what your goals are and how much you need to invest to get there. If you don’t feel qualified to do this, seek a reputable financial planner. Try to find one who will work for a fee and one who does not receive incentives to sell you high-commission products. Remember why you are investing your money, and you will be inspired to save more and may find it easier to determine the right allocation for your portfolio. Temper your expectations to historical market returns. Do not expect your portfolio to make you rich overnight. A consistent, long-term investment strategy over time is what will build wealth.

2. Put your plan on automatic. As your income grows, you may want to add more. Monitor your investments. At the end of every year, review your investments and their performance. Determine whether your equity-to-fixed-income ratio should stay the same or change based on where you are in life.

Conclusion

Mistakes are part of the investing process. Knowing what they are, when you’re committing them and how to avoid them will help you succeed as an investor. To avoid committing them, develop a thoughtful, systematic plan and stick with it. If you must do something wild, set aside some fun money that you are fully prepared to lose. Follow these guidelines, and you will be well on your way to building a portfolio that will provide many happy returns over the long term.

Presently, there are four notable trends in buying and selling in the stock market. U.S. stocks are being purchased by foreigners and corporations while selling is coming from individuals and insiders, or top executives, of companies.

Foreigners are buying

Purchases of U.S. stocks by foreigners in the first quarter of 2012 shows that demand by foreigners has rebounded from the uncharacteristic selling that took place in the second half of last year. Net purchases of U.S. stocks by foreigners in the first quarter totaled about $10 billion, according to the U.S. Treasury.

Companies are buying back shares

After taking advantage of the market rebound in 2009, corporations issued shares in 2010. However, since then they have returned to near record levels of net share repurchases.

Corporations have become net buyers of shares as rising cash flow and wide profit margins compel them to shrink their share count to boost earnings-per-share as revenue growth slows.

Individual investors are selling

Individual investors have been net sellers, measured by the flows of mutual funds that invest in U.S. stocks. They have been selling for 12 straight months. During the past 12 months, investors in these funds have sold more than they did during 2008. Individual investors as a group wield far more buying power and influence over the marketplace. When individual investors make up their minds, they can be a powerful and durable force in the markets.

Insiders are selling

Selling by insiders, or top executives, of companies has been well above average. As of the latest week, according to data tracked by Argus Research of the number of shares insiders have sold and those that they have bought on the NYSE, the sell-to-buy ratio was 7.1-to-1.0 This is a historically high level of insider selling.

Should this data be seen as an important signal by those “in the know” of impending doom for corporate America? History offers a very different interpretation. Corporate insiders were buying in 2007 at the peak, and they were selling in 2009 as stocks were bottoming. Back in August of 2007, around the peak of the stock market, insiders at Financial companies were doing the most buying in 12 years. At the time, this trend was interpreted by some as a buy signal for Financials just before the companies in this sector fell more than 80%. Given this track record, we do not interpret the insider selling as a signal of impending losses. This fact does not suggest that they are acting on any inside information that would benefit an individual investor and instead may be selling in response to a three year bull market that doubled the value of the overall stock market.

Projecting the trends

We expect foreigners and companies to continue to be net buyers while insiders remain sellers in the coming quarters. Fuel for a new bull market would most likely have to come from individual investors. One of the trends powering bond prices higher, and yields lower, is the strong demand from individuals as they continue to shift their investments from stocks to bonds.

The potential for money to flow into the stock market and lift stocks is significant. However, individual investors must first become disillusioned with bonds. Since bonds have offered returns over the past thirty years that are competitive with stocks and provided much lower volatility, many are reallocating their portfolios toward bonds as they seek to provide for a comfortable retirement. It may take a period of rising interest rates from near historic lows to demonstrate the potential for losses and volatility that bond investors in the late 1960s and throughout the 1970s experienced to reverse the individual investor money flows back to stocks.

Read the entire market commentary here.

We thought that the U.S. banks had finally learned their lesson and stopped making big, stupid bets with their capital, and then along came JP Morgan with a whopper of a trading loss.

We thought the employment picture was gaining momentum, and then along came last week’s stumble.  Ditto for the housing market.  All in all, it was a pretty bad week for the economy and the stock market.  I guess we should count our lucky stars that the market didn’t go down more than the 1% that’s in the official record book. But are we vulnerable to a ‘catch-up’ decline this week?  Unless there’s good news that can offset the string of bad news we’ve been hearing lately, I’m afraid that the markets are going to do what they should have done last week – go down more than 1%.

(Charts courtesy of Barron’s online http://online.barrons.com/article/SB50001424053111904370004577390073797664072.html?mod=BOL_twm_mw#articleTabs_article%3D1)