Over 90% of investors have mistakes in their portfolios, according to a recent study. Many of the most common investor mistakes are easily corrected, but you have to know about them first before you’ll realize that they’re costing you money.
Investor mistake #1: Diversification
Automated investment service SigFig conducted a study to find out what the most common investor mistakes are. The firm tracked more than $350 billion worth of assets and discovered that nine out of ten investors have poor diversification in their portfolios, and this is coming a quite a high cost. Last year, one-third of average investors ended the year with returns that were either in the negative or at zero.
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The biggest issue was investing in single stocks, as six out of ten investors have over 10% of their portfolio invested in one stock. Another big investor mistake in the area of diversification is being biased toward their home country. SigFig reported that 60% of investors had less than 10% of their equity portfolio invested in international stocks.
The firm also found that investors tend to have a high concentration in equities, with half of investors having more than 80% of their portfolios in stocks.
Investor mistake #2: Fees
Additionally, SigFig claims six out of ten investors pay too much in fees. The firm identifies “high-cost” funds as those with an expense ratio of at least 0.5%. The firm reports that 60% of investors have at least one “high-cost” fund.
Also investors who use a financial advisor pay, on average, 1.3% of their assets in management fees, which amounts to an average of $7,000 per year.
Investor mistake #3: Neglect
And third, the firm reports that one-quarter of investors’ portfolios have signs of one of two extremes: neglect or overtrading. According to the study, 27% of investors have at least 10% in idle cash in their portfolio, while 25% of investors haven’t rebalanced or contributed to their portfolios within the last year.
Also 20% of investors have a portfolio turnover rate of at least 100%. Interestingly, this study included both men and women, but another recent study indicated that women tend to churn their portfolios less than men, making this issue more of a male problem than a female one.
Investor mistakes are costing us
According to SigFig, the average investor underperformed a portfolio that was 60/40 balanced by an average of 60%.