- Timing the Market doesn’t work– this is probably the single biggest investor mistake. Warren Buffett says, “Anything can happen at any time in the markets, so market forecasters will fill your ear but never fill your wallets.”
- Keeping your long-term money in cash- Being afraid of the market’s volatility will hurt your money. Inflation (costs of goods and services going up) is more devastating than ups and downs in the market. Look to strategies that give you market participation, but limit your downside exposure.
- Risk is misunderstood- If you had an investment that went up 3%, but next year loses 2%, is that riskier than an investment that earns 5% the first year & 15% the next year? People automatically assume that the one that lost money was riskier because it lost. However, investment people would say that the second investment was riskier because the returns were so variable. Risk is really about losing purchasing power, losing opportunities, or not having enough money to begin with. Stocks have historically provided long term returns that have outpaced inflation.
- Active trading doesn’t make you rich- most professionals believe the stock market is essentially efficient, which means it is very hard to outperform over the long run. A couple of lucky trades may be lucky, but not a proxy for your investing prowess. One study feels that active trading costs investors as much as 2% a year in returns and fees.
- Don’t chase hot tips or the hot low-priced stock- successful investing involves staying informed, focusing on the long term and doing your homework. More money has been lost chasing the hot tip, or because it is a $2 stock has a great chance to go up a lot more.
- Emotions- we feel that this maybe is the single greatest deterrent to investing success. If it was a great company at $10, but now it is on sale for $5 because of the market dropping, does that mean it is a bad company now? We look for discounts every day, but with the stock market, discounts are perceived as a time to sell or something that is bad. You need to lose the “get in, get out and making a killing mindset.” Be open-minded, sell your losers, and let your winners run. Don’t take last year’s returns as s barometer for future success. Past data is past data, focus on the future and things to come.
Since 1960, there have been 35 times when the market has declined by more than 8%, which means about once every 20 months. Typically, that has proved to be a good time to buy, like in August of 2015 or January of 2016, when the stock market went back up 12% in 2015 from that point and 13% from the point in 2016. However, staying invested that entire time from 1960, an investor would have made over 200 their money. The Dow’s single best performing day was an 11% move, or 936 points up on October 13th, 2008 when everything was falling apart. Stay focused on the long term prize, buy when things are on sale, and remember the stock market is going to go up and down.