Investing is hard, so hard that even experienced and highly paid professionals get it wrong. So how can do-it-yourselfers come out ahead?
You can do better by reducing your chances of being wrong. That comes less from decisions and more from habits. Doing the right things consistently is a powerful way to insulate yourself from the occasional goof.
Investing mistakes happen. The pros know it takes discipline to minimize the damage. Here are three investing mistakes you must avoid if you want to retire well.
1. Never fail to invest
The risk here is twofold: People often put off saving, even in situations where it can be automated, such as a 410(k). When they do save, they save too little and expect investment returns to do all the work.
The other problem is when people put money away in workplace plans but then leave the money in non-investments, such as cash money market accounts, or buy investments that are too risky — or not risky enough.
For instance, they let company stock pile up in their accounts and never diversify, which creates the problem of concentration risk. Or they buy a portfolio that is, say, half bonds and half stocks, even though they have decades of work ahead of them.
A diversified portfolio that is mostly in stocks is usually a better choice for long-term investments. Sitting on cash in a money market account or in a bond-heavy portfolio is tantamount to doing nothing with the time you have to make gains with the market.
2. Never chase returns
If they do invest in stocks, many investors are pretty good at ignoring their portfolios (on balance, a good thing), at least until there’s an appreciable amount of money at stake.
Then for all the wrong reasons they can become much more active in their investments. A fund that did well in the past five years can seem like a place to put all of your money. Or perhaps one sector has a hot few years, so they dump their diversified holdings and load up on the apparent new winner in the economy.
Eventually, a hot stock and a hot sector cool off, often just after posting large recent gains. Chasing returns virtually guarantees a long-term losing record. You end up buying a lot when specific stocks are high and then getting back out after they fall.
Rebalancing, the periodic selling of winning investments to buy the relative losers in your portfolio, reverses this trend. Forcing yourself to sell high and buy low is the key to creating a long, steady record of positive years in the markets.
3. Never try to “win”
The pressure to beat the market is palpable in the investing world. It can feel like any investment portfolio that falls short of the stock market average is a loser and that any combination of stocks that beats is a winner.
What’s not as clear to many investors is that beating the stock market consistently over decades is virtually impossible. A tiny number of highly skilled professionals have done it, but at great cost and expense.
The vast majority of mutual funds are not run by these wizards and end up trailing the market by a wide margin, mostly because of the fees they charge. It’s as close as you can get to a guaranteed loss, relative to the market itself.
The better route is to own index funds that are low cost, diversify and rebalance. You cannot help but get the best possible return and the more you keep in fees, the more your balances grow over the years.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.