5 Common Mistakes Investors Make
“You can get poor a lot faster than you can get rich.” – Bob Miller
There is a lot more to investing than just setting aside money every month and hoping it turns into a large nest egg when you reach retirement age. Here are 5 common mistakes investors make:
Not Paying Attention To Your Investments
You don’t have to make investing a full time job but you have to put in some effort besides perusing back issues of Money Sense magazine. How well your investments perform can determine when and how you can retire, how big of an estate you can build and whether you will ever get to do the things on your personal wish list.
Whether you’re a do-it-yourselfer or have an investment manager, make sure your assets are managed in a systematic, disciplined way. Have a plan that covers both the short and long term – your life goals. Have a strategy to achieve your goals. Monitor how well the plan is working and adjust it if necessary depending on your results and changing conditions.
Trying To Time The Market
Many people are still searching for the secret of buying low and selling high but it’s almost impossible to pull this off. Even though the market’s overall, long-term trend has been upward, many stocks make most of their gains in short, dramatic spurts. Consequently, the price you pay for being out of the market at the wrong time is enormous.
Not only can you miss out on positive returns, but you’ll also pay transaction costs for making all the wrong moves. Overall, it’s easy to see why buy-and-hold investors have an advantage over those who try to outmaneuver the market.
Letting Emotions Drive Investment Decisions
Money is an emotional issue. It has a lot to do with our feelings of success, security and self-worth. When you use those emotions to make reactive, short-term decisions, you’ll get into trouble.
Irrational fear is usually the force behind the classic investment mistake of selling your stocks after the market takes a plunge. Those with cooler heads and a longer view know this actually may be the time to commit more money to equities.
Some investors are too conservative and let inflation eat away at their low returns. Others ride a tide of enthusiasm and go for the “get rich quick” schemes and super-aggressive investments hoping for a quick score and ignoring the higher risks.
To guard against emotional reactions you need a well-thought-out investment plan that you are willing to commit to.
Underestimating How Much Income You’ll Need
The biggest risk you’ll face is not the chance of losing your principal, it’s the risk of not accumulating enough so that you outlive your money. Calculate how much income you will need and factor in inflation (easier to do when you’re closer to retirement than when you’re just starting out).
Life spans are getting longer with each generation so you may be drawing on your savings for thirty years or more.
Don’t assume you’ll stay healthy. The cost of chronic ill health can mean huge financial setbacks especially if you will eventually need to move to a senior care facility or a retirement community.
Solely Measuring Performance Against Market Indexes
It’s gratifying to learn your portfolio has outpaced the TSX or the Scotia Bond Index and indeed that is how portfolio managers have measured their performance relative to their peers, but it’s much more important to know how well your investment program is doing in relation to your personal goals.
Your results may look great against market benchmarks, but still fall short of the asset growth you’ve targeted. If your portfolio loses money in one year, you’ll have to earn a greater amount in the next year to stay on track.
Look at your actual return after taking into consideration taxes, inflation and other expenses.
By avoiding investing mistakes you will build your wealth steadily and consistently over time without taking unnecessary risks. You’ll know where you’re going and how quickly you are getting there.
I read about a case where a woman inherited a large sum of money and invested it through an advisor just before the market crashed a few years ago. She panicked and ordered the advisor to sell everything, at a 40% loss. Then she tried to sue the advisor claiming this inhertance should never have been invested in the risky stock market because it was supposed to be a legacy for her kids.
She made at least 4 out of 5 of these mistakes. Great post!
Hi Harold. Thanks for your anecdote. We may think we’re a lot smarter than that, but these scenarios happen all the time.
Dollar-averaging will take out the headaches of ups and downs of the market.
@Doable Finance: Dollar cost averaging can be part of a disciplined plan and can reduce the emotional involvement.
“The only thing better than learning from our investment mistakes is learning from somebody else’s.” -Andrew Hallam
@Canadian Capitalist: I actually had 10 common mistakes people make but my post was getting too long. Maybe there’ll be a part 2
shortly.
That right….A good investor should have a third dimension physcology thinking before making a move,a good investor always plan to win not plan to to lose.There are few step must know……
Agree with you that emotions have no place in business. Either you’re a tough cookie or business is not meant for you.:)
I think buy and hold is a good strategy, as long as it is combined with periodic portfolio rebalancing between different asset classes.
I wish that I had sold more of my stock last week, now I will have to wait till they bounce back before I sell.
Everyone knows that you can earn a handsome return by timing the market but timing the market perfectly is sheer luck.
Therefore it is highly advisable that you focus on averaging rather than trying to time the market
Also remember that just because a stock goes down in value it’s not a loss unless you sell it right then. You still have the shares. One of the worst things people did when the market bottomed out was to sell their shares. Why? Why assume it was some sort of permanent condition? When the market was up that wasn’t a permanent condition either. When the stock market was on sale for the past year we bought like crazy. A lot of people dumped blue chip stocks that, at that moment in time, had very low values. Well, ok then, we’ll take them.
Investing seems to be more and more difficult with the game being rigged and markets being artificially steered by our government and other powerful influences, or should I say “influencers”
But, having a long term plan that is followed without too many emotions getting involved is probably the best bet. Personally I went with my emotions and cashed in most of my 401k in June 2011. Will see if that was the right thing to do or not. For sure I do sleep a lot better!
PS. Having 2 parents who all of a sudden need long term care and assistance, and being faced with the tremendous cost of that, it is hard to imagine that most people will have saved/invested enough to cover those absolutely massive expenses.
We’re heading for interesting times…
The best example of the buy-and-hold investor must be Warren Buffett. He made his picks based on a thorough ability to understand the inner workings of a company and was not trying to make the quick buck from market fluctuations.
I agree on your statement that the biggest issue facing most people is that of whether the money is going to last. It seems that medical, care and other expenses of old age squeeze people for all they are worth. Once people have worked their whole life, they should be able to enjoy some freedom from financial stress, but investing now for what the world is going to be like in 50 years? I hardly know where to begin.