What we learn from history is that people don't learn from history.

  ~Warren Buffett

"It's dangerous when people don't know what they don't know."

   ~Dr. Drew Pinsky

“There are well-dressed foolish ideas just as there are well-dressed fools.” 

  ~Nicolas Chamfort

The worlds greatest golfers don't always hit the longest or most accurate drives, nor do they always putt better than the others.  They make the fewest mistakes.

To an incredible extent, outstanding investment success doesn't rely on brilliance, but on simply avoiding The Big Mistakes; from keeping your mind from 'moving.'  Investor behavior is the dominant determinant of real life returns.

A sobering and compelling view into the importance of behavior is the Lipper & DALBAR, Inc. comparison study of the 20-year average annual compound rate of return of the average large cap equity mutual fund in the U.S. and the average annual compound return of the average equity mutual fund investor.  The data is through 2007.

This is incredible! Investors left about 6.4% per year for 20 years on the table.  Investors literally underperformed the very investments they own!  How is that possible?

To invest successfully over a life-time does not require a stratospheric IQ, unusual business insight or inside information. What's needed is a sound intellectual framework for decisions and the ability to keep emotions from corroding that framework.

Listed are some common killer behavioral mistakes that destroy portfolios and plans.  The behaviors are presented in no particular order since the worst mistake is always the one you are just about to make.

1. Over diversification.  He who buys everything ends up with nothing.  He becomes a collector instead of an investor.  Owning twelve 5-star rated mutual funds isn't "safety"; it's an over diversified portfolio that's poised for failure under a false sense of security, and which was born from investors misconceptions.
2. Under diversification. Narrowing the portfolio down to essentially one idea.  That's what investors did during the Dot Com craze which ended when the tech bubble burst.  Over loading the boat with utilities or with any other central ideas usually ends up being a bad idea.
3. Euphoria.  Fear and greed drive markets to extremes.  Before the bubble bursts greed turns into euphoria and people speculate when they think they are still investing.  When euphoria arrives, investors have no fear and no longer even accept the possibility of losing money.  Their only concern is that somebody, somewhere else owns stocks that are going to make more money than them.  It's what scuba divers call "rapture of the deep"; nitrogen narcosis, that blissful state of completely losing your adult sense of danger.  It happens before every market melt down.  Euphoria is more dangerous than greed. At least with greed, you can sometimes talk sense into an investor's head.  During euphoria, fear and risk become abstractions not even worthy of consideration.  That is precisely how it was for the last few years prior to the major melt down from 2000 - 2002.
4. Panic.  You manage panic tomorrow by managing euphoria today.  The world does not end; it only appears to be ending.  All market declines are temporary, because the market--propelled by the economy which it reflects--is permanently rising.  This time is never different.  It's just Armageddon all over again.
5. Leverage.  One can make an intellectual case for margining when it's done in a perfect environment--which doesn't exist for long when it does.  Borrowing on your house at 6% and investing in the long term return of equities of 10% looks great on paper.  In practice though, everybody does it the wrong way.  They borrow at the wrong times and on the wrong terms, so they can buy the wrong things at the wrong times for the wrong reasons.  When you can't meet the margin call, you get zeroed out.  Using leverage can be tempting, but is a bad idea more times than good.
6. Chasing stocks with high-dividend yields instead of investing for total return.  This is the classic mistake of the American retiree.  We intuitively, if not instinctively, are attracted to stocks that pay relatively high dividend yields.  The fallacy in this thinking comes from one simple truth:  High yield investments have the lowest total returns.  In an efficient market, investments with low, or no, dividend yields must compensate by providing the higher long-term total return.  The dividend chaser unwittingly sacrifices return by focusing on high dividend yields.  Sometimes a juicy 6% dividend yield turns out to be a 2% total return.
7. Capital gains taxes  - making sell decisions influenced by your cost basis in the investment.  Your cost is an emotional variable that has nothing to do with its market value.  When you bought something or what you paid for it will not make it perform any better in the future.  The maker of this mistake thinks and says, "I can't afford to sell."
8. Over confidence.  Believing that investing without an experienced professional is easy and that anybody can be successful at it.  Discount brokerage company advertisements promote the "anybody can do it well" belief.  This often results in learning that bad things really do happen to good people.

10. Buying a mutual fund (or stock) based on past performance.  The evidence suggests that the perpetuity of mutual fund returns is nonexistent. The facts are clear but not many pay attention to the facts.  That so many funds "style drift" explains why past performance should be given little if any weight in making decisions.  If a mutual fund uses, say, 5 different stock models in a 10-year period--some models using large cap stocks, other models using small caps and/or mid caps--, even common sense bluntly shows how future performance couldn't conceivably be correlated to past performance; not even remotely.  If you bake a cake with cocoa one day, then bake it the next day without cocoa, you can't possible produce the same outcome; therefore you wouldn't expect the same outcome either.
11. Timing the market.  When you find yourself wanting to time the market, consider that you have to guess right TWICE to keep from shooting yourself in the foot.  You have to guess right about when to get out of the market and then guess right again about when to get back in the market.  People get back in the market the same way they got out of the market; on pure emotion from their moving minds.  Therefore, they wait to get back into the market until it feels right, which is always after stocks have been going up for a while, quite often at the top.
    1. Here is how it usually plays out:  They sell a stock at $50 because they feel the market will go down.  So they watch it decline to $45, then buy it back at $60 or $70.  The reason they don't buy it back at $45 is because they feel it's going to go lower.  So it goes from $50 to $45 and back to $49; but they don't buy it back at $49 because they feel its going to go back down to $45 (or lower) again.  So it moves up to $51 but they don't buy it back because in their moving minds they are $1 to the bad since they originally exited the market at $50.  Then when the price goes up to $55 they aren't about to pay 10% more than the $50 price at which they originally sold.  Then as the stock goes up another $5/share to $60, they start to feel that the price is going to get away from them.  They feel compelled now to buy at $60 because they envision the stock being $70 by Thanksgiving and $100 by Christmas.
    2. The investor feared this stock at $45/share but feverishly loaded the boat at $60; because his euphoria from imagining the price at $100.  These aren't tales of fiction nor are they exceptions to the rule.
    3. The risk isn't being in the next 25% downtick; it's being out of the market the next 100% uptick.
12. Pretending inflation is only an abstraction.  Inflation is real, although opinions vary as to what is the most accurate rate.  The government says that the long term average, since 1970, is about 4.6%, even though food and energy are NOT included in monthly government calculations reported by the media.  The bank CD buyer who earns 3% at the bank guarantees a loss on their investment; and that's before taxes.  Inflation threatens standards of living.

These killer mistakes are born from a mind that is unnecessarily moving.

To reach the upper echelon of long term performance, all it takes is:

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