By Brian Frederick
Learn more about Brian on NerdWallet’s Ask an Advisor
1. Too great a focus on past performance.
It is incredibly dangerous to pick investments based only on prior returns, as what goes down tends to make a comeback and what has done exceedingly well falls back to earth. The things that have the best past performance are the riskiest investments when the market does well and the most conservative in cases where the market is doing poorly. As I write this, stocks have done well in 2013, the last twelve months and the last three years. Do you really believe that the things that have ‘worked’ during that time will continue to work when the stock market inevitably cools off?
2. Too much risk in their investments typified by too much in stocks and highly concentrated positions.
By taking more risk with a portfolio, all it means is that the highs will be higher and the lows will be lower than a more conservative portfolio. When I look at do-it-yourself stock portfolios, I rarely see any exposure to bonds, small U.S. companies, or international companies. The person is only invested in large U.S. companies. Frequently the portfolio will have large positions in just a handful of companies and then a haphazard collection of other things surrounding it.
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