What is the single biggest mistake you see individual investors make?
From what I have been able to observe, it is a lack of discipline. Once someone commits to an investment program and sees their original investment grow 5 percent from $2,000 to $2,100, it is not that impressive. They may instead think, "Why not spend that on a vacation?" But the investor should not quit on the plan and take a long-term view of letting the power of compounding returns over time enable them to reach their financial goals.
What are the pros and cons of including international investments in an investor's portfolio?
The primary advantage is to add diversification to your financial portfolio. There are many times when international investments outperform domestic stocks. Picking individual stocks is quite risky. However, under the umbrella of an international or global mutual fund, you should be able to get adequate diversification and professional management. The risks of international investments include higher volatility, currency risk and basic issues of political stability.
What are the pros and cons of including real estate investments in an investor's portfolio?
Real estate is a very complex category. Investing through a real estate investment trust (REIT) is a relatively safe method of exposing yourself to real estate without the inherent risks of actually owning property. As can be seen with the performance of real estate the last few years, this asset category carries risk. A limited amount of investment in this category could strengthen your portfolio.
What role should alternative investments play in an individual investor's portfolio, and what are the pros and cons?
I would leave this category to sophisticated investors or perhaps at the recommendation of a Certified Financial Planner. If you have a significant portfolio already, there may be a place for these investments. However, you must accept volatile returns and perhaps significant losses. Even though some of these categories have done extremely well recently, with great reward comes great risk.
Special thanks to Kevin Riley, associate professor of business at the College of the Ozarks' Plaster School of Business in Missouri, for participating in this interview.