4 Ways to Screw Up Your Portfolio

4 Ways to Screw Up Your Portfolio
By Selena Maranjian
January 19, 2010 | Comments (0)

 

Sometimes, it can be easy to make money in the stock market. Dumping the bulk of your nest egg into broad-market index funds can instantly make you a part-owner of such successful companies as Apple (Nasdaq: AAPL), General Electric (NYSE: GE), and UnitedHealth (NYSE: UNH). If you'd rather fly solo, finding the right individual stock can bring you massive gains -- witness Intuitive Surgical (Nasdaq: ISRG) and its 50% average annual returns over the past five years.

 

Sadly, though, it can be even easier to lose money when investing. Some losses just can't be foreseen; they happen even to good investors invested in seemingly solid companies. But other times, investors make a classic error -- and pay the price for it.

 

Here are four blunders you'd do well to avoid:

 

Too few metrics
If you focus only on a single aspect of a given company, such as its price-to-earnings ratio, you could miss out on the bigger picture. Check out the different ratings our CAPS community has assigned to stocks with similarly low P/Es:

 

Company
CAPS Stars (out of five)
P/E

 

Noble (NYSE: NE)
*****
7

 

Merck (NYSE: MRK)
****
10

 

Garmin
***
12

 

Qwest Communications (NYSE: Q)
**
10

 

Data: Motley Fool CAPS.

 

A closer look at these companies' other metrics would likely reveal varying debt and cash levels, growth rates, profit margins, and competitive advantages. It can be useful to seek out low-P/E stocks, since they may have been overly punished and due to rebound. But a low P/E can't and shouldn't be your sole criteria for making an investment.

 

Tax obliviousness
Forgetting about the IRS can lead to another needless error. If you net a $5,000 gain in Home Surgery Kits (Ticker: OUCHH), but sell it less than 365 days after you bought it, you'll be the one wishing you had some anaesthetic. Short-term gains -- stocks held for less than a year -- are taxed at your standard income rate; at 28%, you'd pay $1,400 in tax on that $5,000 profit. Long-term gains -- held for more than a year -- get dinged for a much smaller 15%, or just $750 in our example.

 

Looking the other way
Failing to follow your investments closely enough can be another major mistake. You might buy into a biotechnology or pharmaceutical company, for example, because you're enthusiastic about the exciting drugs in its pipeline. But if one or more of those candidates fail to win FDA approval, or report poor results in clinical trials, the company's future could suddenly become less bright.

 

Wandering too far
Finally, we often stray beyond our circle of competence.

• Do you really understand biotechnology? Or the energy industry? Or telecommunications?
• If you don't have a firm grasp of a company's industry and its position in it, you're at a great disadvantage as an investor.
• You need to be aware of developments in and threats to a given industry, and have a clear sense of its winners and losers, before you start investing there.

 

As you invest, focus not only on all the things you do right, or the amazing companies you come across, but also on mistakes you may be making. The more blunders you eliminate from your repertoire, the better the performance you can expect from your portfolio.

 

http://www.fool.com/investing/value/2010/01/19/4-ways-to-screw-up-your-portfolio.aspx