Investors Continue to Make Costly Mistakes

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SEPTEMBER 2005 - Investors without long-term financial plans continue to make five common costly errors, according to members of the Zero Alpha Group (, a nationwide network of independent, fee-only investment advisory firms.

  • Giving short shrift to U.S. small-cap stocks and growth opportunities by chasing returns in exotic foreign destinations. Because international investments have been “hot” for the last three years, they are now dangerously overloaded in the portfolios of many investors.
  • Rushing into real estate, often on a local and undiversified basis, in the same way that investors stampeded into tech stocks in the 1990s. It won’t take much of a correction in real estate prices to put investors that are overconcentrated there into a painful bind. Investors that allow real estate to throw their diversification off balance are setting themselves up for a fall.
  • Treating “hot” investment alternatives, such as hedge funds or private equity accounts, as though they are asset classes. Though this is a perennial problem for investors without a financial plan that latch on to whatever is being talked up in the media and among colleagues, hedge funds and private equity accounts are in many ways even more volatile and less liquid than the hot products of previous years.
  • Taking a counterproductive, short-term view of tax avoidance. For example, many investors buy annuities in order to defer taxes. Such an approach, however, also converts any gains, which would ordinarily be taxed at the 15% long-term capital gains rate, and makes them taxable at the ordinary income rate, as much as 35%. Many investors bought annuities when they were in their accumulation years, and at retirement they find out they are facing the same tax obligation. The drawbacks in this situation are as follows: 1) They are still in the highest tax bracket; 2) They may increase the tax owed on their Social Security income; 3) If they don’t touch the annuity, they disinherit themselves; and 4) Their children will end up paying the taxes after their death.
  • Ignoring the gradually increasing costs of owning an investment. Consider the costs of owning a stock fund inside an annuity, which adds an additional 1.75% to the cost of the fund. The average cost of a mutual fund today is 1.3%. Before the investor makes a return on this investment, the annuity has to clear these significant hurdles.




















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