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Sin #1: Market TimingMarket timing is a strategy where an investor attempts to predict the future direction of the market and then move in and out of the market accordingly. This is one of the most dangerous strategies ANY investor can employ.There are essentially two reasons why market timing is so dangerous:1. Over the short term, the market does not always move logically or predictably. This makes it nearly impossible to time the market. Simply put, it can’t be done.2. Even if you were able to beat the odds and create a system that accurately times the market, the payoff would not be worth taking that level of risk.Investors who attempt to time the market are at risk of missing periods of exceptional returns. This can have a large negative impact on an otherwise well planned investment strategy.Suppose for a moment your timing strategy was slightly off and you missed out on just 30 days of strong performance each year. The result would be disastrous to your overall return. The graph below illustrates the effect of missing the one best month in a calendar year for the period of 1995 - 2007.We should note that although we feel timing the market is an impossible strategy, we have proven that there are inefficiencies in the market that allows investors to accurately identify individual stocks that are poised to outperform (or underperform) the overall market. After years of quantitative research, Zacks has discovered that the most reliable and accurate predictor of future stock price movement are earnings estimate revisions.Sin #2: Investing On EmotionsWhether it’s the morning newspaper, CNBC, the radio or the internet, at any given time you can find a pundit or “market expert” who is predicting major doom and gloom for the market. No matter the situation, at the time of their occurrence it inevitably seems like the entire U.S. economy is at risk. However, it is important to note that these “reporters” are dependent on attracting an audience, and they are much more likely to draw in a crowd by predicting the very best or worst scenario rather than telling you the truth… that whatever turbulent period we are in is par for the investing course.If you take a look at the past eight decades, every year is annotated with a reason to not invest in the equity market. Over that same time, we have witnessed the strongest economy in the history of the world that has provided investors like you with stronger returns than any other investment vehicle.What has history taught us? No matter how grim or bearish individuals around you may feel, over time the U.S. equity market will produce the most consistent and strongest return for your investments. If you are appropriately diversified, you should not concern yourself with the market’s daily volatility.Sin #3: Lack of DiversificationYou may be committing one of the worst investment “sins” and not even know it. Many investors mistakenly believe that because they have several stocks or mutual funds that they are well diversified. However, to ensure true diversification you have to look deeper into your investing strategy.Let’s suppose that you had the noble intentions of creating a diversified portfolio and went out to the market and purchased several mutual funds each with a different investment style. You may not realize it, but mutual fund holdings, often have a great deal of overlap. Take Microsoft for example. You may own a balanced fund, a growth fund, a technology fund and a global fund and each of these may have a position in Microsoft.What exacerbates the situation is the fact that mutual funds do not publish their holdings on a regular basis. Even mutual fund research firms, such as Morningstar, typically only receive the underlying holdings once a quarter. This makes it nearly impossible for you to have a full understanding of the true sector and position weightings of any mutual fund.In a different scenario let’s say you hold individual stocks. No overlap is possible here, but you still may not be as diversified as you think even if you own 10, 20 or even 50 stocks. You need to dig deeper to see your diversification across market cap size, sector and style.At Zacks, we divide the equity universe into 16 different sectors. If you are managing a portfolio of individual stocks, it is important for you to understand your sector weightings in order to ensure proper diversification. Even if you are convinced a particular sector is going to outperform all others, you never want to have all of your proverbial eggs in one basket.
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