Common Errors Investors Make
The stock market has done very well the past six years, rising 200 percent since the 2008 financial crisis. It is easy to believe that this run will continue. But as history has repeatedly shown us, we should be disciplined and watch our step, no matter how much experience we have.
Investing seems very simple: Buy low, sell high and keep the profits! However, studies have shown that a chimpanzee throwing darts picks stocks better than the average investor!
The average investor the past 20 years made only 2.4 percent, whereas the S&P 500 returned approximately 8 percent.
Unfortunately for us, we can be our worst enemy when it comes to investing.
Here are the five most common mistakes investors make. Visit artofsmartmoney.com to get more tips on how to avoid them.
1) Chasing performance and following the herd.
This herd mentality means you are buying a stock with large gains and hoping the trend will continue. However, by the time this “financial mania” takes hold, prices are already at a high. The dotcom bubble in 2000 and housing bubble in 2008 showed what can happen when people chase performance.
2) Letting emotions get in the way.
This is one of the biggest challenges investors face: letting erratic, short-term movements of the markets create anxiety for them, and then reacting improperly. It is good to remember one of Warren Buffett’s classic rules: “Be fearful when others are greedy, and be greedy when others are fearful.” People allow emotions to affect the way they invest and instead of staying invested for the long run, they tend to buy high, sell low and repeat until they are broke.
3) Ignoring the fees.
Not all fees are bad, especially if you are paying for good advice. Nine out of 10 Americans severely underestimate how much they pay in fees. Fees can take a big bite out of a portfolio over time. In a recent Forbes article, they found that the average cost of owning a mutual fund was 3.17 percent! A $10,000 investment in S&P 500 30 years ago would be worth about $230,000 today. But if you add in the 3.17 percent mutual fund fee, the total drops to just under $96,000! Do research to find out how much you are paying.
4) Not diversifying.
Familiarity bias is when you tend to favor stocks you have a personal connection with. Concentrating solely on a few stocks could be disastrous, since you are putting all of your eggs in one basket, especially if it is your company’s stock. Imagine working for and investing in a company like Enron. If the company goes belly up, you not only lose your job, but also your investments.
5) Not knowing what you own.
Sometimes it is easy to “set and forget” your investments. People may think they are diversified, only to find out they are exposed to more risk than they realize. Your risk should reflect the investing goal and purpose you are trying to achieve. Go to artofsmartmoney.com to learn more about creating a portfolio that reflects your risk, goals and timeline.