Ever wonder why you keep hearing about the “Market” returns and how well it’s done over a certain time period, then you look at your own investment portfolio and scratch your head, wondering why you aren’t seeing the same?
It’s mind boggling to see how you continue to underperform, and you always feel like you’re falling behind the “Market.”
Today we’re going to talk about 4 pitfalls most investors get themselves into and how you can avoid them.
DON’T HAVE A PLAN
This is a pretty standard concept in most areas of life, personal and professional.
When it comes to investing, not having a plan can be the driving reason why all the other investing pitfalls consume you. A plan gives you a compass to reference when times are tough.
When the market is shooting up and you’re making money, everyone is happy. It’s not in times of great prosperity that we need our principles; it’s in times of despair and fear.
When we are in a difficult situation, we tend to let our emotions get the best of us.
In the world of investing, you don’t want your emotions to be driving the ship.
I have a set of core investing principles I turn to when times are tough and I start to question things. In coming weeks I’ll post them to this blog so you can use them if you desire.
TAKE STOCK TIPS FROM YOUR NEIGHBOR
There is an old saying in the world of finance that goes something like, “If you’re hearing a stock tip from your barber or neighbor, you know it’s time to sell.”
The idea behind this is that once “everyone” knows about a certain great stock idea, then it’s probably already seen it’s run-up in price. At this point, it’s not the great stock idea everyone is making it out to be.
Of course, it could continue to go up and you could make some money, but over time, you’ll find that by investing in all of the stocks your neighbor tells you to, you’re not going to do as well as you think.
The whole point of purchasing an investment is because you think it will increase in value over time. If everyone else has already bought that investment, the price has probably been driven higher by demand, and you’ve missed out on some of the upside.
Being late to the party isn’t fashionable when it comes to stock picking.
CONSTANTLY WATCH THE MEDIA
I’m not a fan of our modern-day media. I could write an essay about this topic, but I’ll hold off on that for today…
The current media outlets people turn to for investing advice have become more of a side-show of bells and whistles than one of actual guidance.
A great way for you to get derailed from your plan is by taking “tips” from the dozens of voices you see and hear each day on these programs.
The fact is that these shows are not driven by a desire to provide you guidance and help you be a successful investor, they are driven by the need to retain and increase viewership. Which, in turn, will help increase advertising dollars for their mother-company. That’s it.
This type of ADHD programming, where they are constantly throwing you the “next big idea” makes you constantly question your current portfolio, and causes a lot of people to change far too frequently. This can result in a negative effect on your portfolio for many reasons.
I have been in the world of finance for a number of years now. At this point, I do not watch any TV shows about investing. They just aren’t providing any true value.
I have a handful of websites and investing luminaries that I go to for insightful input on the markets. I also read a lot of books on the topic from the greatest investment minds we’ve seen over the years.
The simple reality is this, you’d be much better off implementing a “Set it and forget it” mentality than constantly watching these “investing” shows on TV. And you’ll live a more stress-free life.
INVEST BASED ON EMOTIONS
Step right up and ride the roller-coaster known as The Stock Market!
Investing is not a linear path; it is a roller-coaster ride of ups and downs. Depending on your allocation and how risky you are, the volatility of your ride might be higher or lower than someone else.
A recent study showed that over the last 90 years the stock market has averaged a return of 9.8%. But there were only 6 years in which the gains were between 5 or 10%. Along the way we have also seen years when the market is up over 35%, and years when it is down similar amounts.
What these ups and downs do is create greed in times of outsized returns, and fear in times of depressing downturns. People will buy more and more in a positive market, and they will sell when the market is going down.
The reason that we see this phenomenon is due to emotion. People see the stock market going up, they hear from their neighbor about the great returns she made over the last year, and they think, “I want in on the party!”
Then things start to go south. The market takes a turn for the worse, maybe declining 5%, maybe 10%, maybe more… At this point you start seeing the “wise” pundits on TV saying “Could this be the next ‘Great Recession’?” You can’t help but think “What if it is? I don’t’ want to lose all of my money.” The next day you sell all of your holdings at a dramatic loss, locking in those losses permanently.
My question to you is this: Let’s say you are going shopping. If you’ve wanted to buy that new piece of clothing for a while now, and all of a sudden, it’s gone on sale at a 15% – 25% discount, would you avoid that store at all costs and get out? And if you were thinking of making that purchase, but the store decided to mark up the price an extra 25%, would you go running to the store to buy it at the increased price?
The answer is pretty clear when you take emotions out of the picture. Of course you would rather make the purchase at the discounted price as opposed to the marked-up price. Who wouldn’t?
But, we see the exact opposite in the stock market simply due to emotions and the lack of a plan.
WHAT CAN YOU DO
For most people, it will never be easy to remain calm when you’re losing money and hearing calls for the apocalypse. But there is a way you can.
You need to have a game plan that is founded in core investment principles you can follow in any type of market environment.
If you aren’t sure of what I mean, tune in next week to see my core principles for investing success.