Many investors inadvertently imperil their nest eggs

By Daisy Maxie (Wall Street Journal)

When investments don't pan out, investors often complain about their financial advisers. But there's another side to that story: Advisers say investors are often their own worst enemies. And the pros have no shortage of stories about misguided investment behavior to back that up.

Here, then, is a look at three of the ways advisers say investors most commonly sabotage their own portfolios.

Blowing in the wind. Some investors are just too easily swayed. And sometimes that leads them to sell low and buy high.

These "bold and foolish lambs" are "lured by noise to every treacherous abyss," says Lee Munson, owner of Albuquerque, N.M.-based Portfolio LLC, a reference to German philosopher Friedrich Nietzsche's musings on the human instinct to follow the herd. "These are the people who read something about a stock that has good prospects and they go and buy it."

Buying a stock without investigating it thoroughly and considering how it fits in a portfolio isn't a good idea, but Mr. Munson has seen investors lacking perspective on a much grander scale. One client sold all his stock holdings two days before the Standard & Poor's 500-stock index hit bottom in 2009. "He called me in absolute panic and terror, saying [President] Obama was ruining the country and everything was going to be terrible and he didn't want any equity," recalls Mr. Munson. After the Republicans took control of the House in November 2010—when the S&P 500 already had risen roughly 75% from its 2009 low—the client wanted back in to the market.

Another client, a 70-year-old retired multimillionaire, has about one-third of his assets in a mutual-fund portfolio separate from the money Mr. Munson manages for him in a low-volatility portfolio of relatively inexpensive exchange-traded funds. Each time the stock market has two or three down days, the client sells the funds held in that outside portfolio—often getting back into equities only after the market has risen some.

Focusing too narrowly. Advisers routinely preach diversification as a way to weather the ups and downs of financial markets. But some investors still cram everything they've got into a single type of asset.

Matthew Tuttle, chief executive of Tuttle Wealth Management LLC, a registered investment adviser based in Stamford, Conn., says the mother of one of his clients is looking to retire from her part-time job at a certified public accountant's office. The mother, who's in her 80s, has her entire portfolio in gold coins and stocks.

"Basically she told me the reason is gold never goes down," says Mr. Tuttle, who spoke with her at his client's request. "I told her there had been significant periods in her life when gold had gotten crushed or remained flat; it's just been the past couple of years that gold has been a great investment."

Still, she's holding onto her gold, Mr. Tuttle says. "I tried to convince her to get rid of some, but that was an uphill battle."

Plenty of people fall into a similar trap with other kinds of investments. P.J. DiNuzzo, president and founder of DiNuzzo Investment Advisors Inc. in Beaver, Pa., says many new clients have portfolios consisting almost entirely of U.S. investments, without international diversification. And one client had a retirement portfolio entirely invested internationally, while another had a $900,000 retirement plan invested in just one international mutual fund, he says.

Not focusing at all. Diversification is good, but a scattershot approach to investing is likely to miss the mark, advisers say.

In what he calls "a management nightmare," James Gallo, a fee-only adviser in New Providence, N.J., is working with a 60-year-old couple who have their assets spread among several different advisers.

"They have no concept of their overall allocation," says Mr. Gallo. "How do you manage it when you have assets with four different brokers and three different banks?"

The couple invested in technology stocks until they crashed, then plunged into financial stocks until they crashed and still held those shares when they sought Mr. Gallo's help in October 2010. At the time, they also held various target-date funds in different brokerage accounts. He's been working to consolidate the couple's holdings with one or "at the most" two brokers, and to make sure they're properly diversified.

The question, Mr. Gallo says, is whether they'll actually act on his advice. "They say they're on board, but I've done plans with clients and I call them back six months or a year later and many of them just don't follow through."