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By Jason Stipp | 10-19-2011 02:30 PM

Benz: Learning From My Own Missteps

Morningstar's director of personal finance shares discoveries from her own experience as part of Morningstar's 5 Days to Better Investing.

Jason Stipp: I'm Jason Stipp for Morningstar as part of Morningstar's 5 Days to Better Investing, today, we're talking about investor mistakes and how to avoid them.

We're going to get a little personal today and ask Morningstar's Christine Benz about some of the mistakes that she has experienced in the past and what she has learned from them. She being a good sport for sharing those with us. Thanks for joining me Christine.

Christine Benz: Jason good to be here. I hope to turn the tables on you one day and hear about your own investments.

Stipp: Well, that might be a long video. So, we'll have to wait and see on that one.

So, I talked to Pat Dorsey this week about some ... of the mental problems that investors have and have trouble getting over, and it and that can lead them to make certain decisions that aren't in their best interests. One of them is recency bias, and you had an example of how you were affected by recency bias. What was that?

Benz: A couple of examples. Jason. I started at Morningstar in 1993. That was a period when growth stocks were really outperforming value. So, I think probably my initial 401(k) portfolio here had a little too much of a growth emphasis than it should have had. We had a fund called PBHG Growth in the plan. It turned out to be just a terrible fund, blew up in several different ways on several different occasions, and I'm sure I probably sold it at an inopportune time, but I definitely had too much growth in my portfolio.

I also drank the Kool-Aid on emerging markets in early '90s. I still think emerging markets are a decent part of one's portfolio, but I bought, I think it was my first non-401(k) plan fund, bought an emerging-markets fund, and I believe that I sold out around the late 90s '97-'98, there were a couple of crises that affected emerging markets. They sold off very sharply. And I sort of looked at the asset class and wasn't a believer anymore, and probably should have been at that point versus doing the performance-chasing I was doing when I initially bought in.

So, those are two good examples of when I have fallen prey to recency bias.

Stipp: On the specific stock side, you had an experience also related to the tech boom that had to do with the relative valuations. What was that?

Benz: It did. That Tech Wreck that we saw in early '00s kind of took a few years to unfold. There were a few steps down early on where tech stock sold off very sharply, and I and I'll say some of my other colleagues here at Morningstar, took that as an opportunity to buy into some of those tech names because their relative valuations looked better than they once did. Of course, they were by no means fairly valued at that point.

The specific stock I bought was Microsoft, and Microsoft didn't know that it was once $100. It still had a long way to go after I bought it. So, I think that was another example of thinking about the recent past and using that as a lens to position my portfolio, which usually isn't a good thing to do.

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