Rob Arnott, chairman and chief executive officer of Research Affiliates and creator of the Fundamental Index® methodology, shares his thoughts on how investors can enhance their long-term returns by avoiding the following three common mistakes.
1. Not saving enough. Most people spend too much and set aside too little to invest. Rob recommends that they try to save a good portion of their income each year to build up real wealth.
2. Having unrealistic expectations on market returns. Many investors expect the markets to deliver more than is plausible. Rob explains that, in a world of low yields, long-term returns could be relatively anemic. Investors must be patient.
3. Chasing past success. Investments, unlike normal goods, become more popular when their prices rise and less popular when their prices fall. Rob suggests that investors rebalance into areas that are cheap and take profits on those that have become expensive.
It’s interesting to note that these three mistakes are easy to understand and are controllable by the investor. That said, when it comes to avoiding these mistakes, folks get tripped up on the implementation. For instance, It’s hard to save more money once you are locked into a particular lifestyle. And it’s normal to want to hold on to winners and shun losers.