Many opportunities for improved investment performance if we simply realize the mistakes we are making in our portfolios. Jonathon Citrin, founder and CEO of Citringroup, has some tips on how to turn things around.
Mistake #1: Thinking markets are efficient. Markets are both inefficient and random, meaning they do not always reflect the underlying fundamentals e.g. unemployment, earnings, or GDP growth in our economy and also often move randomly up and down without regard to expectations.
Mistake #2: Confusing the cause with the effect. We too often interpret fundamentals e.g. unemployment, earnings, or GDP growth as the cause, and market movement as the resulting effect. In reality, both fundamentals and market movement influence each other - it is a two way relationship. This realization can lead to significant insight into portfolio management and security selection.
Mistake #3: Thinking simple diversification is enough. Investors are much too easily satisfied with the traditional asset allocation of US stocks, US bonds, and international stocks. This is simply not enough. In today's world of tremendous volatility and converging correlations, we much reach further for diversifying assets that will truly mitigate risk in our portfolios.
Mistake #4: Believing in a higher power. Investors continuously have this idea that there is an answer - that someone, somewhere knows exactly how the market will move tomorrow and the next day. Simply - no one knows, there are no market experts/gurus.