who is the redheaded stepchild of allstate's Distribution system?

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investing Avoiding the Biggest Investment Mistakes By Markus Bruderer Let’s face it; every investor makes mistakes, even those with the most experience, such as Warren Buffet. In 2004, when asked at the Berkshire Hathaway annual meeting what his worst mistake was, he explained: “I set out to buy 100 million shares of Wal-Mart at a price of $23. We bought a little and it moved up a little and I thought maybe it will come back a little bit. That thumb-sucking has cost us in the current area of $10 billion.” Most of us are not likely to miss on such a grand scale, but staying clear of the most common mistakes can save us a bundle nevertheless. Here are the areas where the most damage can happen. Investing without a Plan Before you commit large amounts to various investments, you should develop an overall strategy that takes into account your financial goals and objectives, time frames (investment horizon), as well as your risk preferences. Otherwise, you may start down a path that is unfocused or is leaving you with clusters of risk that you may not be comfortable with. Making adjustments later can be both time-consuming and possibly very costly. It is also beneficial to start investing regularly and as early as possible to take advantage of long investment periods as well as compounding effects. Under-diversifying or over-diversifying A large concentration of similar investments can potentially have negative consequences but could also prove to be very successful. It boils down to properly assessing risks and making sure that you are comfortable with the exposure. Diversifying into different types of investments usually lowers the overall risk and should result in a more steady development of the overall results. Owning multiple properties may tie up a lot of capital and expose you to the swings of the real estate market. In addition, buying and selling houses is a timeconsuming and expensive process. A more efficient way of participating in the real estate market may be through REITs or ETFs which are liquid and can be traded anytime with very low transaction costs. “ While investing long-term in CDs and bonds is too conservative in most cases, it is also possible for people to invest too aggressively.. “ Under normal circumstance, reinvesting profits into your insurance agency may have similar effects over time. For many agents, their book of business represents a major portion of their overall wealth, so it is imperative they think carefully before reinvesting in their agencies in this economy, especially when you are exposed to the whims of Allstate. If you are investing in the financial markets, the overall mix between cash, bonds and stocks is one of the most important factors to determine long-term success. For example, if you are holding a small number of individual stocks, you are dependent on them doing well. For example if Apple, Amazon.com and Coca Cola are your top holdings, you stake your success not only on these three companies, but you have also a big exposure to the information technology sector. Or, if in addition to the large investment you have in your Allstate agency, you hold a substantial number of Allstate shares; you could be overly dependent on one company’s well-being. We believe that mutual funds or ETFs provide the best solutions to gain exposure to most markets – both geographically and asset class-wise – while still being able to control risk category selection. You could also over-diversify by owning a number of mutual funds with similar investment themes. Those funds could be holding the same stocks and create big concentrations, not only in single names but sectors as well. Investing too conservatively (or too aggressively) This aspect is closely tied to the age of the investor. When younger people invest for retirement, many are too conservative and do not take the (usually) long investment horizon into proper consideration. With today’s life expectancies, retirement itself can easily last 15 to 25 years or longer. Many look primarily at bonds and CDs to provide a steady investment income stream when approaching or during retirement. The danger with bonds and CDs is that their return usually does not compensate for inflation over longer periods of time so their purchasing power can erode as a consequence. 50 — Exclusivefocus Winter 2011/2012
Apple Inc. While stocks can be more volatile, they have historically provided better returns over long periods of time than bonds or CDs. While investing long-term in CDs and bonds is too conservative in most cases, it is also possible for people to invest too aggressively, especially when a large portion of their assets is tied up in business operations that carry high levels of risk or are too difficult to exit. Investing extensively in Allstate agency operations may be an example. Another example that can cause difficulties would be financial market investments that consist only (or predominantly) of stocks, hedge funds or some of the leveraged and/or inverse ETFs that are now available. These investments may have been developed over longer periods of time and may no longer be suitable for the investor. Falling in love with or sticking too long with an investment Over the last 3 years, Apple Inc. has quadrupled in price from below $100 to approximately $400 per share (chart above). Participating in this run up is great, but it could be time to consider whether this rise is sustainable going forward and if the time is right to lock in some of those gains. Taxes may play a part in the decision, but realizing gains and paying capital gains taxes at the current low rates is preferable to possibly seeing the paper gains evaporate in case of a severe downturn. The opposite can happen when an investment has gone down substantially. Often investors continue holding on hoping that it will recover not only the losses, but turn into the winner they envisioned when they invested initially. The best approach is to objectively assess the potential for a recovery. It may be much better looking at alternatives with better prospects as opposed to sticking with a losing holding. Source: moneycentral.msn Chasing performance Learning about spectacular returns in an asset class, manager or fund may lead to committing at the wrong moment. One can get caught up in the excitement. Alan Greenspan famously spoke about “irrational exuberance” in late 1998 and was proven right 1 ½ years later when the Tech/Internet bubble burst in early 2000. We saw gold rise to $1,900 per ounce this past August only to fall back to $1,600 (-16%) in late September before recovering subsequently. Latin America and Brazil in particular were the darlings of the investment public for a period of time before correcting this year. These are just a few examples of situations where people may have been under the impression that they were going to miss out on great returns. Most often this happens toward the end of a positive cycle for the particular investment just before reaching a top. The subsequent declines can be very steep. A lot of mutual funds invested in technology have not yet recovered to this day from the losses they suffered when the tech bubble burst. Reviewing your investments regularly with a competent advisor should avoid this. Not Rebalancing After you have developed your overall investment strategy, you should rebalance regularly to bring the investment allocations back in line with the overall plan. Rebalancing is a contrarian action and is often difficult for investors since the best-performing holdings are reduced while buying more of the worst performing asset classes. Rebalancing seems to be unprofitable right up to the point where it is spectacularly paying off when either the badly performing asset classes take off or the “stars” suddenly fall. This disciplined approach will prevent a lot of harm over time and still leaves you with flexibility to adjust your overall strategy and allocations over time. Ef Markus Bruderer is vice president of UN- FCU Financial Advisors. He has more than 20 years of private banking experience domestically and in Europe. Prior to joining UN- FCU, he was with Bank Julius Baer & Co. Ltd, N.Y. and Deutsche Bank, N.Y. He can be reached by phone at (212) 324-3902 or by email at mbruderer@unfcuadvisors.com. Winter 2011/2012 Exclusivefocus — 51
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