1. You're Taking too Little Risk
Proper finance goes far beyond the cliche risk vs. reward thinking, but there is some truth in that oversimplistic expression of financial theory - you must expose yourself to at least some risk in order to obtain returns. A portfolio that is without any risk will only earn the risk-free rate. Portfolios that aren't exposed to less risk than other, all else equal, will generally earn less than more risky portfolio.
Obviously, prudence would dictate that the proper amount of risk be taken, proper risk mitigation tactics should be used, and preferably deep value investments will be made in order to create extremely low-risk higher return investments. However, shying away from any risk or taking too little risk will usually lead to subpar returns.
Investors should examine things such as the following in order to better understand their risk tolerance:
This means that a single 30 years old earning $100,000 a year with a healthy emergency fund is likely not exposing himself or herself to enough risk if they have the vast majority of their money in CDs. They would do themselves a big service by prudently moving some money into the stock market so that far higher returns over the long run can be gained. Such a move could move the return of the portfolio from 2% to 8% - a difference that will likely mean millions of extra dollars over the course of a full investing life.
2. You Are Churning Your Portfolio Too Much
Too many investors buy and sell and buy and sell and buy and sell. They spend ridiculous amounts of mental energy, precious time, and precious money on trading fees attempting to:
Churning your portfolio will cause damage for the following reasons:
You're not a hedge fund or a trader. You don't have a supercomputer sitting near Wall St. You don't have PhDs working for you. Play the game where you have an advantage, not the game where you are deeply handicapped. Buying calmly and sitting is usually better than heavy coughing for most investors.
3. You're Trying to Pick Stocks, BUT You're a Terrible Stock Picker
Top investors such as Warren Buffet and Monish Pabrai can pick stocks - they have a true talent for it and they spend their lives doing it. What makes you think you can compete with them? Would you enter an Olympic swimming competition just because you enjoy taking laps at the local YMCA? No - that would be ridiculous. So, why do you think that you are capable of picking stocks when the cards are deeply stacked against you?
Of course, some small time investors are great at picking stocks. They are talented and lucky. If this is you, you don't really need this advice. But if you keep putting in time and energy tiring to pick the next five bagger or ten bagger only to see your portfolio trail indexes such as the Dow Jones or the S&P 500, you must ask yourself why you are wasting so much time. Why not just sit back, buy the index, and relax?
Take a hard look at your portfolio if you're in this camp and be honest with yourself. You can leave a bit of play money to mess around with, but the majority of your money might be better off in excellent mutual funds and ETFs that track both US and global indexes. These mutual funds and ETFs can be matched to your risk tolerance and time horizon and they offer market returns at almost no effort to the investor.