In this final edition of the Investing Made Easy series, I’d like to detail some common investing mistakes. Investing doesn’t have to be complicated but we make it so by doing some very silly things. In the end, our meddling brings nothing but frustration and lower returns.
I’ve already touched on a few of the most common mistakes in previous articles such as not having a plan, failing to evaluate one’s risk tolerance and ignoring investing fees. And of course we want to understand every investment into which we place our money. If we don’t understand it, we shouldn’t be investing in it.
I’ve noticed through the years however, that other, less obvious issues inhibit me from having the success I desire. Each of them have hampered my investing at one point or another and it was only through losing money and honestly evaluating myself in the mirror that I was able to overcome them. (“Overcome” is a strong word, because they still creep back up from time to time and I have to fight them off again and again.)
Common Investment Mistakes
Getting Swept Up With Emotion. Stock market action can be volatile. At 10:00 AM on any given morning the market could be up 150 points and by the end of trading at 4:00 PM be down 200 points. String a series of days together with positive price action and euphoria and overconfidence sets in. A series of days with negative price action can lead to misery and doubt.
Fear and greed can drive stock market action. Greed – that we will make millions; fear – that we will lose it all. These emotions are so powerful they literally blind us from making wise decisions. In my investing lifetime, my mind has been engulfed with the cloud of uncertainty these emotions generate. In those moments it’s as though my mind is in a daze not thinking rationally and certainly not paying attention to investing metrics such as valuation or earnings. I just want in (greed) or I just want out (fear) depending on the circumstance.
For beginning investors, emotions are powerful. For seasoned investors, emotions are powerful. Making investing decisions based on our feelings is dangerous. Learn to control them as much as possible.
The Level of Monitoring. There are two sides to this issue. On the one hand, we have an investor who makes the mistake of neglecting his or her portfolio. They invest in a stock or a mutual fund and don’t look at it for years. They have no idea what’s going on in the fund, what kind of company events are affecting the stock or how the market action is driving the price of their investment. This sounds amusing that someone wouldn’t pay attention to an investment but it happens all the time.
On the other hand, we have the investor who obsesses over each up or down stock tick every day the market is open. They have the financial news on all day. These are the people who have a trading ticker open on their computer’s dashboard at work so just in case something big happens they can make a quick trade over lunch (or on the company clock while their supposed to be making sales calls).
We must maintain a balance of monitoring. I am generally aware of what is going on in the market from day-to-day only because I’m reading news online. I don’t check my portfolio each day to see my gain or loss. Maybe twice a month I’m checking that and only twice a year do I complete a thorough evaluation of my net worth.
Don’t obsess but don’t neglect investments either. Find a place in-between that allows you to stay aware but also have a life.
Taking the Fast Track. It’s hard work and takes time to get rich. Most of us would rather have it happen fast. Come on…be honest. We know this to be true. If you think I’m nuts, answer this simple question, “Would you rather be given a million dollars next week or 10 years from now?” My hand is up for next week. Where do I sign up?
Because we have this feverish desire inside of us, we take unnecessary risks and fall for ridiculous get-rich-quick schemes. Then the risk we took becomes a nightmare when our money disappears as the investment comes crashing down to earth.
Make it a practice to ignore the little get-rich-quick devil sitting on your shoulder whispering sweet nothings into your ear. Consistent, focused discipline over many years is the more tried and true method of producing wealth.
Listening to the Wrong People. Can I beg you to turn off the TV? Why are you pondering the “hot tip” you heard from your best friend’s wife’s racquetball partner? Will you please not take financial advice from your father-in-law who just came out of bankruptcy?
Everyone has an opinion about money and investments. It’s OK to listen and process these opinions but in the end the only one that really matters is our own because we set the investing agenda for our lives. We evaluate our risk. We set our own goals. We place the money down at the investing table. Once our plan is in place and functioning, it makes little sense to divert from that plan because a talking head on TV said the market is overbought and we should take profits. But we do this again and again.
Hold true to your investment philosophy, and only adjust after great study and evaluation. Don’t be swayed by opinion so easily. And remember, the financial media exists to create ratings for their respective networks. There agenda is to get you to watch, so they make EVERY market event seem like it’s the most important one. Keep this in the back of your mind the next time they say the sky is falling. It’s most likely not.
Too Much Diversification and Overlap. I’ve mentioned before that the most basic rule for investing is to keep it simple. For most of us, basic investments in mutual funds, individual stocks, and bonds will get us diversified enough to sleep easy. There are other investments that could bring further diversification such as investing in gold and other commodities, land purchases, or rental real estate. It’s important not to feel pressured to put money into every area possible. One can achieve an appropriate level of diversification by just investing in mutual funds.
Also avoid creating too much overlap by investing in funds that basically hold the same stocks. For example, all the stocks in the Vanguard 500 Index Fund are also in the Vanguard Total Stock Market Index Fund and many are in the Vanguard Large Cap Growth and Income Fund. They are not in the same proportions in each fund but holding all three of these in a portfolio would create significant overlap. Be aware of the basket of stocks that make up a mutual fund by reading the funds prospectus before investing.
Investing comes with a challenging side as you can see in these common mistakes. Be prepared to take the necessary steps to deal with them as they creep up in your life. By doing so, you will greatly increase the chances of having a successful investing career.
What other mistakes do investors make?
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