Successful Investing – Helping Investors Avoid Common Investment Mistakes

The Top Mistakes made by Investors

In my dozen plus years of advising individuals and businesses I have found a number of common mistakes that have derailed even the best laid financial plans. I thought by sharing them I might be able to help others sidestep the pitfalls and the negative impact they can have on your portfolio and long-term financial plans.

1. Failing to establish a time horizon and investing accordingly -

If you have expenses that need to be funded in 3 years or less, you should not be investing the cash for them in the stock market or other risky investments. These monies should be carved out of your investment portfolio (the money earmarked for long-term investing) and invested appropriately in liquid assets such as money market funds or term-certain fixed income offerings. If the money is not going to be needed for 3 years or more, an investment plan should be established based upon specific a time horizon and risk tolerance for these funds.

2. Failing to thoroughly diversify your portfolio -

Many investors know about the concept of diversification and think that by owning different investments, they are diversified. Diversification of an investment portfolio makes good sense on an intuitive level. However, it wasn’t until Harry Markowitz published his model of portfolio selection that this concept became a formalized part of sound investment practice and formed the basis of today’s Modern Portfolio Theory. Beyond this basic concept of diversification, the key to Markowitz’s premise is the revelation that the risk of any investment can be reduced and/or performance increased by forming a portfolio of diverse and non-correlated assets. That is, it is important not just to seek a diversity of asset types, but also to seek assets that have low or near-zero correlations to one another. It’s not about owning different investments; it’s about owning different, non-correlated investments.

3. Letting potential tax implications rule your investment decisions –

Many investors delay selling an investment that has done well regardless of how good or bad the future looks for the holding. Their response is, “I will have to pay taxes if I sell.” By not selling, they set themselves up for not having to pay taxes at all – usually because the investment starts on a decline and their concern switches from “having to pay taxes” to one of “hoping for a turnaround.” Don’t be afraid to take some profits off the table. While taxes are an unpleasant result of investing, I prefer to look at them as a positive sign as it indicates you are making money and your investment plan is working.

4. Buying a stock based upon a “hot tip” -

Too many investors listen to a friend’s advice because he or she always seems to have the next “great” money making idea. They don’t take the time to assess the idea personally and jump in because it’s only a few thousand dollars they are investing. Unfortunately this is not investing – it’s gambling. If you want to gamble, go to Vegas and at least get free drinks, dinner, a show and a room for the risks you are taking. Any investment that is being considered for your portfolio should be thoroughly researched and have passed a comprehensive financial screening scrutiny.

5. Attempting to time the market -

Waiting an extra day, week, or month to try and buy in at the “right price” just doesn’t work. No one can predict the future. If they could they most likely wouldn’t be sharing this knowledge with you for free. Successful investors use time, patience and a disciplined approach to increase the likelihood of maximizing their investment returns – not trying to time the market. If you have done the research and the investment is sound and meets your criteria then buy it, regardless of timing.

6. Failing to regularly reevaluate your investments -

Over time all investment styles, strategies and types fall out of favor. So, like timing the market, it becomes virtually impossible to know what is going to be “hot” in the next bull market and what isn’t. For this reason it is always prudent to stay up-to-date on your investments to insure they are still the same investment that you originally purchased (segment drift and manager changes can be one reason they may have changed). If your investments consist solely of mutual funds then an annual review is a good place to start.

7. Basing investment decisions on emotion -

Maybe the stock market is going through a bad time because of a short-term geo-political or economic event. Stay calm and make an educated, well thought out decisions about what, if anything, to do. Assess whether the event will affect the economy long-term or if it’s just a short-term blip. The best move is often no move at all. If it is a short term incident, many times the smart, prudent investor will make additional investments because the current decline provides them with an excellent buying opportunity. The key to successful investing is to have a disciplined strategy and to stick with it.

8. Cashing out gains and dividends rather than reinvesting -

Once you’ve realized gains or had distributions and dividends paid out, insure they are reinvested back into your portfolio. If you pull out your capital gains, dividends and interest, your money won’t compound as quickly, thereby leaving you with a smaller chunk of change down the line. Letting your investments compound is one of the major tenets of successful investing.

9. Owning too much employer stock -

Many people get over-weighted in employer stock because of options and stock purchase plans made available in today’s competitive compensation packages. While these are great supplements to their annual salary they can put an employee in a position of having too much money invested in their employer’s stock. Additionally, it is quite common for people to invest in “what they know” and what do you know better than the company you work for? To compound the problem many people will add more employer stock to their 401k holdings and individual brokerage accounts. Not only does this create a diversification problem in their portfolio but it also subjects them to excessive single stock risk. A good rule of thumb to follow is to insure that no more than 5-10% of your entire investment portfolio is in any one single stock. If you find yourself in this situation the importance of creating a well thought out reduction strategy cannot be overstated.

10. Following the herd -

The most successful of all investors are moving in the opposite direction of what everyone else is doing. They buy when most are selling and sell when everyone else is buying. By following this simple plan you can preserve your capital and potentially sidestep the next bubble (can anyone remember real estate, internet stocks, and technology growth funds?).

11. Not investing at all –

Somehow in today’s society that Mocha Cappuccino Latte seems to take precedence over saving for the long-term. We are a society who wishes to satisfy the “here and now” rather than the securing our future. The important fact here is that those two are not mutually exclusive. In fact, BALANCE is the key in any long-term endeavor, but by always keeping an eye on the end goal you can make sure it is not out of mind while satiating the here and now.

12. Investing without a plan -

Investing without a plan and lacking the discipline to follow it is a sure way to lower your chances of success. The chances of obtaining any long term goal can be greatly enhanced by creating a strategy, following it and regularly reviewing it frequently enough so it reflects any changes that have taken place since implementation. Many investors start off with a small amount of money and start putting it to work without a plan. As time progresses they find they have a mish-mash of investments in their portfolio with no clear strategy or direction. It’s never too early to invest but it’s even better to invest early with a plan.

13. Taking too little risk -

Some people don’t want to take any risk and cannot stand the volatility involved with risky investments. While it may seem like you are keeping your money safe and secure by not taking risk, it is more than likely you are not because of inflation. If your time horizon is greater than 5 years it is recommended that you have no less than 25-30% in growth investments (i.e. stocks) in your portfolio to ward off the effects of inflation. The actual percentage to own is dependent upon many factors including but not limited to age, time horizon before money is needed, current financial situation, etc. A good general rule of thumb to use as a starting point for the percentage of equity you may include in your portfolio is “120 – your age.”

The Importance of Your eCommerce Site for Your Business

It is plain to see why a poorly designed website can be a major problem to online businesses, most especially during the holiday season, which covers 20% to 40% of the yearly sales.

In this regard, those who need data validation can refer to the stats that explain the importance of your brand’s presence on the Internet:

  • Before people shop at a physical store, they often check websites of online stores.
  • Customers search online for the prices and availability of goods so they would know whether to shop online or at physical stores.
  • During an economic crisis, consumers exercise caution when shopping online to stretch their budget, resulting to an increase of website traffic.
  • Shoppers that tend to purchase downloadable gifts like eBooks, music and FB credits, among others, will likely buy more.

Optimize Your Online Site Immediately

Now that you are aware of your site’s importance, what should you do before the holiday season approaches? It is never too late to try some of these strategies:

Prepare for unexpected traffic.Plan ahead of time to make sure that your site can manage all the orders. Anticipate peak loads, observe the responsiveness of your site and assess application performance way before Cyber Monday.

Increase the speed of your site. Use a CDN (content delivery network) for a speedy delivery of relevant content with videos and images to your consumers.

During the holidays, most shoppers use their mobile devices to search online before heading for the stores. Therefore, it would be wise to incorporate an in-store experience with info regarding your well-timed and relevant personalized website and mobile apps.

Find ways to let the customers easily find your products on the web. To improve exposure, submit a feed to the top online shopping comparison engine, Google Product Search. Try the Amazon Marketplace or add pay-per-click ads to Amazon Product Ads’ product and category pages. This way, shoppers will be able to view your ads when they find products that are similar to yours.

Though social media is not the main channel for searching, it has targeted the mainstream and has therefore gained importance, specifically to GenY shoppers. Transform visitors into sales channels by including social sharing in product pages. Display good customer service in public by resolving issues with customers on networking sites like Facebook or Twitter.

People who are low on budget usually search online before buying, so it is a good idea to follow the example of various sites in making it fun, simple and efficient to shop on the web. Provide product filters, rich product details, comparison tools, well-designed navigation and recommendations. Enhance the images of your best-selling products, emphasize your value propositions and make sure that shipping and return policies are clear.

Fix your leaky conversion funnel immediately by adding simple and cost-efficient website usability and feedback tools.

Whenever possible, ask for the visitor’s email address and try to squeeze a lot of value out of each sign-up.

Try to employ remarketing campaigns so you can target consumers who take time to buy.

Lessons Learned From An E-Commerce Adventure

It is better to have tried and failed than never to have tried at all; and even more important to learn from your mistakes.

That is what I keep telling myself after having invested the time and cash equivalent to a Harvard MBA in an e-commerce start-up that has stalled and is winding down. Not a happy prospect in light of all the media pre-occupation with e-commerce success stories and the young millionaires watching their IPOs rocket into cyberspace. But the headlines ignore the more frequent stories of new e-commerce businesses that do not hit the stock market jackpot. Many of them either settle into a low-key niche or exhaust their resources and fold.

This is the story of an Internet venture that did not make the headlines, but offers some useful insights for entrepreneurs evaluating their own initiatives. The lessons learned are applicable to your own new venture or to an investment in someone else’s.

In mid-1998 we launched a new company called nxtNet (www.nxtnet.com) with the slogan … “taking you to the next level on the Internet”.

My partner and I both had prior successful entrepreneurial experience in computer products and wanted to start a new venture together. We decided to develop a business that would catch the next wave of e-commerce services for mid-sized companies seeking to do business on the Internet. After long discussions, searches for a unique service offering, and many draft business plans, we developed a market strategy and then chose Intershop Communications as our software development platform. This product had the advantages of being suitable for single or multiple online storefronts, and offered a flexible, economic and comprehensive solution. We committed to the product, staffing, facilities and equipment to start training and development immediately. The two of us provided the time and cash required to get started.

By October 1998, we had an initial product with application as an online storefront for an associated computer business. At the same time, we realized that the application had wide appeal to other computer dealers and could be sold as a multi-user database service and e-commerce resource. We had developed a consolidated catalogue of 85,000 computer products from multiple distributor product databases that allowed rapid search and comparison for product information, pricing, and current sources. Users could access the catalogue from the Internet and find a product by manufacturer, category, and part number, key word or price range and immediately see the alternate sources and prices with links to more technical information, preferred dealer pricing and actual stock levels. Additional features allowed the catalogue to be customized so that any computer reseller could present the database as his own online storefront. This option offered all the search and product information features to his customers, but showed only retail pricing and enabled the online ordering process.

The product offering quickly received positive feedback and strong indications of support from all the participants – resellers, distributors, and manufacturers. It was a comprehensive, powerful, and effective tool for buying and selling at all levels within the Canadian computer distribution channel. Resellers recognized the value in an online resource to save time and effort. Distributors and manufacturers saw the opportunity to promote their products, and major publishers in the industry wanted to offer complementary online services to their subscribers and advertisers. How could we fail with all this enthusiasm and support?

While the potential for success clearly existed, everybody had the same questions and reservations – “Who is there now?” “How many are using it?” and “I don’t want to pay until it’s bigger”.

Reasonable objections we thought, so we added features and content for free. We promoted the product with free trials and low cost subscriptions for reseller access. Then we coaxed, persuaded, sold hard, and made deals. The “contra” became the standard for obtaining press coverage, free ads, mailing lists and promotion in exchange for free participation and future consideration. Activity on the Web site and catalogue grew to 3000 visitors per month with over 800 subscribers and the distributor list increased from three to twelve.

But revenue remained near zero as most reseller subscribers declined to pay for the service. Reasons were “it should be free – let the advertisers pay”, “I don’t use it enough”, “there are lower cost options”, or “we built our own solution”. The audience did not grow fast enough even after we offered it for free, to satisfy the advertisers and content providers. Without persistent and conspicuous sales and marketing efforts, all the participants quickly lost interest. Meanwhile the costs of database maintenance, ongoing development, site hosting, Internet access, sales, marketing, and administration were increasing.

Clearly the old entrepreneurial model of controlling costs and growing revenue was not going to apply. We had to realign our profile to show how zero revenue and high initial costs could still lead to significant investment returns like other well-known Internet ventures. So from early 1999 we started an aggressive search for financing, estimating our requirements at $500,000 to $1,500,000 over the next two years before achieving positive cash flow. More business plans, spreadsheets, and glossy presentations to demonstrate future valuations up to $20 million, even $40 million.

We knocked on many doors, from banks to government agencies, from angel investors to venture capital, from stock promoters to business consultants, and again received lots of encouragement, but no financing. So the founding partners were faced with a continuing cash drain, no relief in sight, and the limits of their own resources rapidly approaching. It was time to put the project on hold. Strategic partners or investors might still be developed to proceed with the project, but the ongoing expenditures were stopped in late 1999.

So what are the lessons learned? We already knew that nothing ventured, nothing gained. We now also knew that big successes in the new economy require big investments. Entrepreneurs may start small, but large investments will be required from new sources to achieve significant success. And no one will put significant money into a venture unless it is the only remaining requirement.

The concept, product, development, marketing and staffing all have to be in place before an investor will provide the final ingredient – his cash. Exceptions are likely only where the management team has already succeeded in the same arena, or the investor himself can deliver the missing elements, such as customers or management skills. No investor is going to take the chance that the entrepreneur with a good concept or product will also be able to deliver the required management and marketing skills to succeed, after he has the cash.

Next time we will know better. And there are side benefits from this expensive learning experience. I can now admit that with the knowledge gained through our association with Intershop Communications, I was confident enough to make an investment in their stock on the German Neue Markt at 65 Euros last year. It went over 400 Euros last month and is still rising with their rapid growth and the prospect of a NASDAQ listing this year. Almost enough to recover my investment in nxtNet.

So the most important lesson is that education in the new economy is essential, and not free, but it can lead to success outside the original plan. Learn, be aware, and be aggressively opportunistic.

Your Kids Do not Need Electronic Learning Toys

We've all seen the advertisements for toys, videos, even teaching programs for babies promoting to give your child an academic edge. Maybe we've been moved to purchase those toys that teach colors, counting, and ABC's in English and Spanish. Maybe we've been consumed with guilt because we did not give our children these toys, and we'll always wonder if we are the reason they might turn out to be something other than rocket scientists and neurosurgeons.

Is there anything wrong with these toys? No, nothing at all. They are often cheerful, colorful, and include a catchy tune your toddler or preschooler will enjoy. And they do, in fact, give kids early exposure to those basic academic skills. The lights and sounds are delightful rewards for your little one who is exploring the buttons, dials, and sliding levers. All that exploring improves their eye hand coordination and hand strength, aka "fine motor skills."

So what's the problem? Well, frankly, the problem is parents expect the fancy "teaching toys" to live up to the hype, and give something back for all the dollars paid to get this toy or gadget. After all, do not the toy companies know what they are doing? Does not the app teach a very obvious skill, like matching? It sets parents' mind at ease, and they may feel the kids are getting a superior education. Some may feel the toys are better teachers than moms and dads. Some may feel that adding extra "teaching time" with the child would be unnecessary. This is a very dangerous way of thinking.

We have to ask ourselves to think – how do kids learn? Toddlers and preschoolers are not ready for lectures and power point presentations any more than they are ready for these kinds of "lessons" the so called learning toys are trying to provide. This may seem like comparing apples to oranges – lectures are obviously for teen and up, but those learning toys are fun and kid friendly, right? Wrong. How could they be likened to a lecture? Because of one key ingredient that is missing in both instances, the very thing that makes it inappropriate for a child – it is not attached to a meaningful personal experience or social interaction.

Lectures are one sided. A speaker presents information, the listener soaks it in. Sometimes the audience is invited to participate somehow, but it is usually limited. The learning toys are only slightly better. They make their noises, and some of them try to get the child to press a button to respond. The child is cheered for or asked to try again depending on how they respond. Does this count as a meaningful personal experience or social interaction? No, not at all. The child simply listening to a computer. They are not holding and working with real objects. No one they care about is sitting with them to provide the encouragement or praise. Instead they hear a computer voice that is empty and repetitive. Sometimes the machine responds inaccurately, like when the child sets on the toy and the toy cheers for the child who incidentally sat on the button that was the correct the response. Like a lecture, these toys are impersonal, use representation instead of real objects, and may even give inaccurate feedback.

Do you still think those learning toys are superior?

Let's take a look at naturally occurring learning now. You can call it the unplugged version. Junior is in the sandbox with Grandma sitting nearby. His fingers are covered in sand, providing delightful sensory input. (If you are not familiar with "sensory input" just think of all the stuff kids like to touch because it is so varied – sand, paint, jell-o, beans, rice, water). Whenever you add sensory input, you are activating more parts of the brain, which aids in memory and learning in general. The sun is shining, the birds are singing, the light breeze is blowing, all the more sensory input that makes outside so much fun for kids. Junior is busy pouring and scooping sand. He plays pretend with a dump truck and uses it to transport sand to the "construction site." Grandma and Junior chat while he plays, and she gives him words to learn like empty, full, big, little, wet, dry. Junior is in charge of the play scenario. He fills up that dump truck himself. He shows how and when and where to dump it. Grandma smiles and encourages him. She challenges to make "a great big pile" of sand and applauds when he does. Junior beams with pride.

What just happened out there in the sandbox? Meaning happened. That sand was in Junior's little hands, not pixels on a screen. He scooped by using his little hands and muscles, not with a stylus tapping on a screen. He learned about physics out there, as he learned how hard to push the truck to make it go through the sand, how much pressure he needed to lift up the dump truck, what happened to the sand when the bucket was already full, how far Water splashes when he dumped it all at once. He was encouraged to keep going when the bucket was not full yet and Grandma helped him understand that full meal up to the top. He accomplished an actual physical task that he could see, touch, and be proud of. He got lost in the joy of make-believe play, which is critical for child development. Grandma's praise was genuine and accurate, and he loves that lady to pieces so he did not give up until he got it right.

So now we have seen how a real task, like sandbox digging or block tower building, with real people, is obviously better than tasks on a computer screen. But what about the ABC's, you ask? What about the counting in English and in Spanish? Times have changed drastically, and the pressure is really on once kids get to kindergarten. You want your future neurosurgeon to be ready!

OK, here's the truth. You can teach a toddler letters. You can teach shapes as complicated as "cylinder" to a two year old and she will be able to name it when she sees it a few weeks later. You will beam with pride. She can learn to count to ten, too. The question here is, should you?

It comes back to meaning. A child can count to ten, but does she understand what the numbers mean? Does she know that 8 is twice as many as 4? That 4 is one less than 5? That there are five cookies on the plate but when she eats one, that there are now four cookies? And what earthly purpose does a toddler have for adding the word "cylinder" to her vocabulary? She can learn letters, but she will not learn to read any faster. And without regular re-teaching, your child will quickly forget these things – for the simple fact that they do not hold any meaning for her. Our memories work by sorting and associating concepts with familiar things or in a way that makes sense. And all that academic mumbo-jumbo you gave her does not have a "storage drawer" inside that developing little mind. She has not got any place to store it that makes sense, so it fades quickly. So if it is not going to stick, why waste her time with it? Why not go outside and play in the sandbox? We know the lessons learned out there are going to last.

As your child approaches kindergarten, you will want to ensure he is "ready." Today's standards mean he should know a great many things, including letters and how to hold a crayon, his full name, and how to hop and skip. But starting to teach academies in baby and toddler years is not necessary. In fact, it may rob children of the time they could have spent filling and dumping a bucket of sand.

Still not convinced? Consider the child's growing mind. At one year of age, your child still thought he was an extension of you, and that he could control you. He fought, you fed him. He was bored, you played with him. You left him, he hinded until you returned. He tantrums because he can not control you any more. And he is mystified! He can not sort it out. Now fast forward to age 2. He's still tantrumming regularly. He cries because his meatballs are "all gone" even though you look in his bowl and see meatballs still there. Was that even the issue? Nobody knows! Now I ask you, is he ready to learn the complicated sound / symbol relationship of letters and begin to read? Is he ready to count in Spanish? Probably not. Research suggests kids are not ready to recognize and remember letters until … ready for this? … age five . That is shocking considering today's grueling pace. There is also some evidence that early exposure to letters and learning to read does not matter at all. A child can learn to read, and learn in a matter of months, if you wait until the child is developmentally ready to do so. That's around age seven. Of course, in America we do not wait until a child is seven to get started, the point of this is remind us that child development happens in a predictable, linear fashion. It can not be rushed. Development happens on child's schedule, not due to parental diligence with flashcards and learning videos. However, your child still has loads of things to learn. He is ready to play with you, listen and learn from a real person who loves and cares for him. He wants to please you, and wants to interact with you.

You do not have to "try" to teach a young child. Simply interact with him, talk with him, and ask him questions. Let him try things on his own and help him be successful. Learning happens in play, not on a screen or with a computerized toy. You can play pretend, build, paint, dig, hop and run, and even sort and categorize familiar objects like food in a toy kitchen. You can bake cakes and wash the bowls afterward. You can play catch and make up a simple game. You are all your child needs. Computerized toys can never replace the invaluable learning that happens when you simply play with your child. Choose toys that allow for problem solving, building, pretend play, or dress-up outfits. Do not forget about things like blocks, balls, and books. These classics never fail to entertain and to teach, too. Best of all, it is easy to join in and play with your child!