• Using mutual funds, which have various drawbacks. A good reason not to own mutual funds involves taxes — one of the most significant factors determining net returns in any investment. The exasperating thing about mutual funds in taxable accounts is that even when you lose money, you can be taxed on gains that the fund made previously. So sometimes, when you lose, you lose some more. Another problem with mutual funds is that you can't get out of them until the end of the trading day. So when the market is in rough water, you just have to sit there and take it. If you have enough money to diversify across 20-30 stocks, you might be better off building your own portfolio.
• Always playing the market in one direction — up. Most investors buy in anticipation of rising prices. Yet many professionals and astute amateurs also invest in downward movement by shorting stocks -- essentially, betting on their decline – or buying Exchange Traded Funds (ETF's) that short the market. For example, the ETF issued by ProShares, the Short Dow30 (DOG), seeks results that correspond to the inverse daily performance of the Dow Jones Industrial Average. Professional traders use these techniques, called hedging, to hedge or protect their stock investments. If the market falls, these techniques provide protection. Too many individual investors don't use such strategies to reduce risk.
• Failing to enhance their stock portfolios by using options. One type of option, a covered call, is a contract that gives you cash (called a premium) in return for your obligation to sell a stock at an agreed-upon price within a set time period. If the stock reaches the agreed-upon price, you must sell – but you get to keep the premium. If the stock doesn't reach the agreed-on price, you get to keep both the premium and the stock. If you have stocks in your portfolio that you're thinking of selling anyway, why not collect a premium by selling a covered call? You'll eventually sell the stock, but you can collect premiums in the meantime.
Successful investing is a complex endeavor involving myriad factors. These errors and omissions are related to only a few of these factors, yet the principles they entail are among the most critical affecting investing success. By avoiding these blunders – and taking the right proactive measures instead -- you can go a long way toward increasing your returns.
Byron Studdard is founder and president of Studdard Financial a firm in Sarasota, Fla., dedicated to helping clients build wealth, protect it and pass it on to future generations. A Certified Financial Planner®, Studdard is listed in the Guide to America's Best Financial Planners (published by the Consumers' Research Council of America, an independent research company).