Investing Mistakes to Avoid
Investing Mistakes to Avoid
· Sell when the market is down
There is an old saying about investing, "If you look at the floor and it is red from rose peddles, it is time to sell. If you look at the floor and it is red from blood- it is time to buy". Many inexperienced investors tend to sell when the market drops, locking in losses. However, someone is always willing to buy those shares at a discount.
· Buy high, sell low
According to JP Morgan Asset Management, in the 20 year period ending in 2013, the average investor made a return of 2.5%. Yet, in the same time period, the S&P 500 Index earned 9.2 and the Aggregate Bond Index earned 5.7%. Humans are social creatures and tend to follow the herd. Thus, people who have not been investing in stocks before tend to go in at the top of the market only to see their investments go down in value. Then they sell at the bottom only to repeat this cycle over and over again.
· Stay on the sidelines until the market calms down
Often, people wait until it feels "safe" to go back in. It will only feel "safe" to go back in after the market has appreciated again and the biggest gains have already happened. It is not easy to time the markets and few do it well consistently.
· Watching for stock market tips on cable TV and radio shows
Few tips on stocks have any lasting value because the stock market immediately updates any news that impacts a company's stock price the moment it is reported. Lessons learned from the field of Behavioral Finance point to the importance of acknowledging all of our investing biases and avoiding the pitfalls caused by them. Cable TV and radio shows make you more susceptible to panic selling and investor remorse. Every pundit considers himself or herself an expert. Their advice is typically conflicting. Remember that no one can predict the future and you should only be in the market if you are a long term investor.
· My best friend says ____ is a sure thing
Here again.... No one can predict the future. Avoid investing tips. They usually lead to investment losses.
· Ignore fees
You should always know the cost associated with an investment. Is there an upfront sales charge, surrender charge or 12b1 charge? What are the management fees or advisory fees?
· Use an investment model
If you plan to invest in a model that has 60% invested in stocks, you need to periodically rebalance the portfolio back to this model or you could wind up with a much more aggressive portfolio as your stock funds appreciate in a rising market. Periodically rebalancing also allows you to take profits and to buy assets when they are cheaper.
· People are often swayed by the latest and the greatest
There are always going to be "darlings" in the stock market. Over the years I have seen many favored stocks fall out of favor and lose value. You often make more money investing in a company when it has stumbled and is beginning to recover. Investors are often overly optimistic in rising markets and overly pessimistic when the market goes down.
· Doing a " Hail Mary Pass" to an overvalued stock
If only you had invested all your money in __________10 years ago, you'd be a millionaire today. You can fill in the blanks (Apple, Google, Amazon.com etc.). Betting a large portion of your assets one investment in a hope and a prayer is a dangerous gamble and it is not investing, it is gambling.
Having been at this a long time, I remember all of the companies that have fallen on hard times. In fact, in 2011 alone, there were 86 companies that filed for bankruptcy according to BankruptsyData.Com. Some of the largest bankruptcies of all time include General Motors, Chrysler, Enron, CIT, WorldCom, Washington Mutual, and Lehman Brothers. All were "Darlings" at one time.
There is no silver bullet when it comes to investing. Everyone’s goals, time horizon and financial circumstances are different. If you would like to discuss this further just give me a call at 201-843-0044.