This post has been sitting in my drafts folder for months now and there seems no better time to release it than now. As global markets are in turmoil due to the virus, our emotions can get the better of us and we can end up making some really bad financial decisions which have the potential to do long term damage to our financial health.
Make no mistake, the virus will pass. Things will go back to normal, but the financial decisions you make during this crisis could be felt for a lifetime.
Investing can be tough, especially if you are trying to manage your own investments or you are investing for the first time. There is a ton of information out there – some of it good and some of it bad. You have to be careful who you listen to and what advice you take on board.
Regardless of your investment experience or knowledge, there are some mistakes that almost all investors make. If you have made any of these mistakes (or all of them), don’t feel bad – most people are guilty of at least some of these investing errors.
Many of these mistakes people make simply because they are human. Human beings have all sorts of internal biases which often mean that we are not that well set up to be good investors.
So without further ado, let’s look at some of the more common investing mistakes.
There are loads of people who think they can ‘time’ the market. This means they think they know when is a good time to invest (i.e when the market will go up) and when is a bad time to invest (i.e. when the market will fall).
You often see articles making sure-thing predictions about what direction the market might take in the next week/month/year. Especially at times like these when some global stock markets are breaking new record highs, people will begin to say “there simply must be a crash now, stocks are at an all time high”. (Note: this was written before the virus crisis)
These predictions are total baloney. Over short periods of time, numerous studies have shown that no one can consistently predict the direction of markets. In fact, some researchers have gone back retrospectively and looked at the accuracy of the predictions made by supposed experts, analysts and gurus. The result – they have an almost exactly 50/50 chance of predicting if the market will go up or down. You might as well flip a coin!
I am immediately suspicious of anyone who says that they can time the market. First of all, if they can, then they should be a trillionaire by now. They should be out there re-mortgaging their house and betting everything on the stock market moving in their chosen direction. As such, if someone tells me that they can correctly time the market, unless they are a trillionaire (I don’t think we have any of them on the planet yet!) then I take zero notice of what they are saying.
The same goes for the countless articles and ‘special reports’ making predictions about what will happen to the markets in the coming week/month/year.
There is an old investment adage that says ‘time in the market is important, not timing the market’. In other words, it is the amount of time that you are invested and not the timing of the market that will lead to long term wealth creation.
There is never a ‘good time’ or a ‘bad time’ to invest, there is just the time we have now. Another old adage says that the best time to have started investing was 20 years ago, the second best time is today!
Most investors suffer from what is called ‘home country bias’. This means that they prefer investing in stocks and bonds from their own country. If you live in the US, this might give you a preference for US stocks, if you live in the UK, UK stocks etc.
This is only natural. It is clear why we would feel more comfortable investing in things that are more familiar to us – things which we better understand.
But – this can have serious implications for your investment portfolio. It means that you don’t have any diversification (where you spread your money across different countries and different types of assets). This means that if your particular country gets into trouble (goes to war, has an economic crash, starts a trade war etc) then your whole portfolio could be in trouble.
Much better to have a good spread of investments across all sorts of different countries and sectors. That way if one part of your portfolio gets into trouble, chances are that another part will be performing well to offset any losses.
Human beings suffer from another investing bias called ‘loss aversion’. Basically we hate making a loss on an investments – it kinda stands to reason.
The problem with this is that it can lead us to hold onto a losing investment for too long in the hope it will recover. This is often a poor investment strategy however as sometimes an investment never recovers – it just keeps on falling.
A question I like to ask myself when it comes to a losing investment is this:
“If I had new money to invest right now, would I choose to purchase this investment”.
If the answer is ‘no’, then you should probably sell the investment and buy something else instead.
Just like the mistake above, we also hate to sell winning investment, as well as the losing ones.
This creates an interesting paradox where we won’t sell an underperforming investment and we won’t sell one that has outperformed either. As a result, we end up selling nothing.
Now, don’t get me wrong, often holding onto an investment for the long term is the right thing to do.
Sometimes however, it will be right to sell. Either an investment is likely to continue falling and it is time to get out now or an investment has done well, but is unlikely to do any better. In both of these scenarios, it makes sense to press the sell button and move on.
The best way to avoid ever really having to make these tough decisions is to invest in a broad index-tracker fund, that tracks a major stock market index like the S&P 500 (the top 500 companies in the US). This way, you just get the performance of the whole index combined and you don’t have to constantly monitor your portfolio and make changes. Make sure you avoid mistake number 2 though and diversify your investments across different stock market indices in different countries.
Many people seek advice when they are thinking of making an investment. Some people will consult their Dad, some their friends of family, other people will ask the Plumber or some guy down at the pub!
The point is that unless they are investment professionals, they probably don’t know much more than you do. Sorry to sound harsh, but it’s true. If people who are well qualified and have spent a career investing money can’t predict what is going to happen in the markets, what chance does your best friend have? Zero is the answer!
If you are going to take advice on your investment portfolio (and you should – especially when it starts to get a bit larger) make sure you are speaking with someone who is properly qualified and has significant experience.
Asking the Plumber which investments to choose is like asking me to install your new bathroom suite (which as my wife will gladly inform you, would be a very bad idea indeed!).
So there we have it. 5 common investing mistakes that almost everyone makes. If you already have an investment portfolio, why don’t you give it a look and see if you have made any of these mistakes – and be honest!
If you are new to investing, you can look for an avoid these mistakes to ensure you get started on the right foot.
If you need more help with your investing, I suggest you sign up for my 7 Day Fast Track Financial Freedom Course – just fill in the box below.