Jittery Joe's and Patient Patty's...Biggest Investing Mistakes Revealed!

March 10, 2011 - PRLog -- I just wanted to review some of my thoughts about short term tracking of investment strategies. One of the biggest mistakes I see my clients make is to switch strategies after a few months when their accounts go down. I have witnessed this for years. Then inevitably, right after they switch investment strategies (with me) the investment strategy they just left starts to go up and the investment strategy they move into goes down.

It happened last year (2010), with the TDP(R). From January 1 to August 31, the TDP(R) investment strategy was down 4.03%. I had roughly 2 clients decide to get out of the TDP(R) and move to my short term bond strategy. There thinking was that the TDP(R) wasn't growing and that they had waited long enough (8 months). They wanted to be "good stewards". I advised them to stay the course because even though their account wasn't growing they weren't down that much. I only recommend changing strategies, for a client, if they experience a big loss. A big loss, because of how important it is not to have big losses, is the only "unpardonable sin" for an investing strategy in my opinion. That is why I changed the TDP® strategy after October 2008 to be more active (long, short, cash) with the diversified positions.

Then from August 31st to December 31st, 2010 the TDP(R) went up over 10% and finished 2010 with a nice gain. Meanwhile the short term bonds my clients moved into went down about 2%. So now these clients are really feeling regret over their impulsive and ill-advised decision. They essentially cost themselves about 12% during that time period. Oh by the way, my short term bond strategy, designed to outperform CDs by 2%/year after all fees, was up tremendously during the first 3 quarters of 2010 and went down only in the 4th quarter. This short term bond strategy also finished up 4.47% for the year, thus outgaining the 1 year CD by 3.47% for 2010.

A decade or so ago clients would only receive yearly statements. Then it went to quarterly. The stock brokers (Schwab, Merrill Lynch, etc.) and Wall Street learned quickly that the more often they sent out account updates to clients the more money they made because, in general, people lack patience and can't control their emotions so they made changes (trades), not based on a strategy but feelings. Then brokers moved to monthly statements and finally landed on 24/7 access of accounts and trade confirmations (you gotta have those trade confirmations, its just being a wise steward;)! Custodians and brokers have never been more profitable. I am fee only and don’t get paid on trades.

As an investor you should understand: There will be consecutive months (up to 12) where we will have a small loss or little/no gain with money you are taking more risk with to grow. There should not be huge losses (because those are too important and avoiding huge losses are the single most important aspect of any long term growth investing strategy, in my opinion).

I have a long term growth investment strategy in place for all my clients and taking it "out of the ground" every 30 days to check progress may not be the wisest thing because it may cause us (client and advisor) to make investment decisions based on the next 30 days. As a client, you don't want your investment advisor making moves with your money based on the next month. In other words, you don't want me worrying about how a move will affect your account over the next 30 days because this will hurt your long term returns. My advice is to use the 30 day checkup only to check for big losses (10+ percent).

In summary, I don't think it is important to look at an investment strategy over a 30 day period. I believe 3 years is the most valuable of all time frames to judge an investment because it gives the investor a chance to truly gauge whether or not the goal of long term growth is being achieved. If a big loss happens during one of the quarters then, yes, I would consider making a change to the strategy.

I do want to help all of you to be good stewards of what God has given you. And I do want to give you information that will allow you to "be aware of the condition of your flock.” My belief is that quarterly would be better. So keep on the lookout for big losses in the short term (90 days) and use longer time frames (3+ years) to judge the overall success of a strategy.

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Eleven Two Fund Management is a Registered Investment Advisor (RIA) located in Marietta, GA. We are proud to be working with Christian Individuals, small business owners, and Families in over 16 states.