You see and hear many things when you help people with their investments. I got to see this first hand during my career in the financial services industry, particularly the last five as a stockbroker with a major online brokerage.
I saw some good things, like the 20-something investors with $300,000+ in their account thanks prudent saving. I also saw some real doozies that still make me cringe.
No one is perfect, and we all make mistakes. That’s a given. It’s the foolish mistakes that really impact the bottom line.
Here are five foolish investing mistakes I saw everyday as a stockbroker that get the best of us.
1. Chasing Performance
Investing in the stock market is a numbers game. You want to see a return otherwise you’re treading water at best. Countless times I would hear investors say, “I’ve only seen X% return in the past quarter!” and want to jump ship. This short-term thinking often gets you nowhere and brings added commission costs.
We don’t like to admit it, but it’s often the boring buy and hold strategy that serves most investors best. A 2014 Vanguard study bears this out, revealing that across nine different sectors, each one reported a better return for those who bought and held vs. those who chased performance.
As tempting as it is; don’t solely look at the most recent performance. Rather, look at how the investment works in relation to your overall investment plan.
“Performance-based plans are only as good as your last statement. What happens when the performance doesn’t perform. This turns into taking more risk in the portfolio than your own risk tolerance allows,” says Kenneth Feyers, founder of Safety of Principle Wealth Management. Whether working with an advisor or managing investments on your own, focus on the long-term, not the day to day.
2. Thinking You Can Beat the Market
The twin sibling of chasing performance is believing you can time the market. In many cases, market timing results in investors selling low and buying high – the opposite of what we should be trying to accomplish. As the Peter Lynch quote goes, “There are no market timers in the ‘Forbes 400,'” yet the appeal draws many investors who think they can time the market.
Instead, we should consider low-cost index funds through Vanguard or using a robo-advisor like Betterment or Wealthfront. If it’s good enough for Warren Buffett, it should be good enough for us.
3. Listening to the Media
The media may be fodder for a good laugh, but in most cases, they’re simply that when it comes to investing. “By far the biggest mistake I see today is letting the media dictate how you invest. While the media is loud and comes from every direction today, they simply don’t know what’s in your best interests,” says Clint Haynes, CMFC® of NextGen Wealth.
Many in the media sound like they know what they’re talking about but in reality they know nothing of your particular situation. This is why it’s so important to take what we hear in the media with little credence. As Haynes points out, “…let your personal goals dictate how you invest; not the person on television who’s simply looking for ratings.”
4. Not Being Properly Diversified
Proper diversification is a hallmark of sound investing. Sadly, too many think picking a small handful of stocks means they’re diversified, without realizing that they’re opening themselves up to significant risk.
On the flip side, many investors think that because they invest in mutual funds or Exchange-Traded Funds (ETFs), they’re diversified. Little do they realize that if they don’t look at what those funds hold, they could own a group of holdings that leaves them more open to risk than they realize.
The same thing can happen when you work with an advisor. You may get a product, but it’s not a plan based on your needs. “Just throw a couple of mutual funds together, add an annuity, sprinkle in a few stocks…..and you have the perfect portfolio. Until next year when this isn’t really what I wanted,” says Feyers, revealing the point behind diversification – coming up with a plan that’s built for the long-term with many conditions and your particular situation and goals in mind.
5. Ignoring Your Investments
Ignorance can cost investors thousands of dollars in wasted money. Whether it be a corporate action or price plummet, if you never check on your investments, you can lose big.
However, checking in on your investments too often leaves you open to making emotional decisions. How often then should you check in on your investments? Garry North, Managing Director/Partner of Master’s Advisors puts it best. “Checking up on your accounts when you get quarterly statements is a good habit to keep, but don’t make investing decisions based on account values; make them based on your financial plan.” While there is no set timetable to check in on your investments, once a month, quarter or some other interval serves most investors best.
It’s inevitable that we make mistakes. Take the mistakes as opportunities to learn and grow your portfolio in the right direction.
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