Not long ago, Wall $treet Week with FORTUNE co-anchor Geoff Colvin spoke with Brian Perlman of Greenwald Associates, which conduct research earlier this year for Merrill Lynch to uncover the most common investing mistakes, and explain why they're repeated so often. Our Nov. 19, 2004 broadcast included excerpts from their conversation. Here are portions that didn't air:

» Your investing type

GEOFF COLVIN: So the competitive investor is probably, it sounds to me like someone who thinks that he or she is good at this, right? Highly confident.

BRIAN PERLMAN: Oh, they do think they're good, right.

COLVIN: And so they think that whatever they've bought is probably going to be a winner, which suggests to me they're probably going to hold on too long?

PERLMAN: No. Their mistakes more tend to be going after, buying the wrong stock or buying the wrong mutual fund.

COLVIN: Now how does this approach that you have outlined, the whole four different personalities and different mistakes they make, differ from the sort of standard approach to investor behavior analysis that has been done up till now?

PERLMAN: Well, one of the most common approaches to investor behavior is a risk/tolerance approach, and what risk/tolerance does is -- and there's several different measures that do this -- they ask you several questions on how willing you are to take risk. They score you, then they take those responses and are able to design a portfolio for you, because they can basically say, based on how much risk you're willing to take, how much risk should be in your investment portfolio. And for that reason, financial planners like to use this approach. It also protects them...

COLVIN: It protects the planners.

PERLMAN: The planners, because you get a sense of how much risk this person really wants. And if you give him a portfolio that's too risk, has too much risk in it, then you're not doing your job as a planner. So they like this idea that you can say I've got a sense of where my, how much risk this person wanted to take, and then assign them a portfolio based on that. Now what I don't like, I shouldn't say what I don't like, but where I think the risk/tolerance approach falls short is it's a little defensive for me. It tends to assign risk based on not having stocks in your portfolio that the investors are uncomfortable with, which is a good thing to do, but I think you can take it a step further and look towards the positive and look for ways of correcting mistakes and choosing stocks and mutual funds that make sense given where the person's at in life, not just based on avoiding mistakes.

COLVIN: We've all been told the rules forever, and yet people consistently violate them. And I gather there's now a branch of economics or financial study aimed at answering this question, yes?

PERLMAN: That's right. I think, and I want to first focus on this study, from this study I think we get some sense of what's going on. I like to say that the investor can't see the forest through the trees. What's happening is everybody makes mistakes. Even the top financial advisor in the world will make mistakes. The key is that when you see the forest through the trees, you understand that you have to have a long-term horizon, you have to rebalance your portfolio, you have to have a well-diversified portfolio. If you do all those things, these mistakes won't bite you. They won't come up to hurt you as much as they can if you don't have a well-diversified portfolio where you end up with too much money in one area, and when that area ends up losing money, that's when the mistakes really affect you reaching your long-term goals.

If you're a competitive investor, you can, you know that sometimes you can be overconfident and greedy and you need to back off a little and address those issues.

COLVIN: Two of these groups, the unprepared investor and the reluctant investor, both didn't start investing early enough. Now they realize eventually that they made that mistake, and you can't go back in time to fix it. So what can they do?

PERLMAN: You still have to have a plan in place. You need a plan to get from point A to point B, and maybe that plan won't get you from $50,000 to $2 million overnight, but what we've discovered in the research is that if you try to hurry and get there too fast, particularly for the unprepared cluster, that you're going to end up in worse shape than when you started. So no matter where you start, you can always get better, and you need to get on the road and move in the right direction.

COLVIN: And it sounds like face reality about what you can do versus what you would ideally like to do.

PERLMAN: That's right. One of the things we discovered in this research is that one of the drivers in mistakes are that people tend to look at individual events that they did. For example, they'll look at one stock they bought or one mutual fund they bought. And one of the things that people don't think about is that if the plan is a long-range, multipurpose kind of event, you need to look at your whole portfolio, you need to look how diversified you are. If you start from the big picture and work in that direction, your plan's going to be on track eventually, and the mistakes you make might hurt you in the short-term, but in the long run you'll be okay.

COLVIN: Two other groups, the measured and the competitive investors, both are characterized in part by holding on too losers longer than they should. Now this is a common enough error, but what guidance can you give people about how not to do it? Okay, you've got a loser. You've got to cut it loose at some point, but how do you decide what that point is?

PERLMAN: Well, there's a couple of ways. The measured investors actually do rebalance their portfolio, and I think rebalancing your portfolio is a very important thing to do.

COLVIN: Right, and you can do that regularly, right? You can say every 12 months I'm going to do it.

PERLMAN: Yes. But it also helps in this issue to get some professional advice, because the advisor can take an arm's length look at what you're doing and say, well, you've done a good job up till now, but my sense is, for example, this sector is about to drop and you've got too much of a loading in this sector, maybe you should lighten up on it. Those are the types of things that sometimes you can't see for yourself and someone could give you a little support with.

Now I should say that over the last two or three years, sometimes people have actually switched directions and have panicked and sold investments too soon. We've seen that with the turmoil in the stock market. So people can do both of those mistakes.

COLVIN: Although I suspect that the second one is probably less severe, right? It was either the first Lord Rothschild or Bernard Baruch I think who was asked, "How'd you get so rich? And he said, "I always sold too soon." A lot to be said for it.

PERLMAN: A lot to be said, certainly. And some of that depends on the direction the market's moving in, and different times, different ones of those mistakes can be more severe than others.