by David Rae
I’m extremely lucky to have a smart and successful group of clients, many of whom came to me after falling victim to the 3 simplest of investing mistakes. Whether rich or poor, market folly does not discriminate. Win by not losing is often the least stressful path to financial independence.
“The Stock Market has a very efficient way of transferring wealth from impatient to the patient” as the sage of Omaha Warren Buffett once said.
Many novice investors often thinks being a successful investor is just about picking the “best” investments and maybe even timing the market perfectly. Realistically, investing is about making smart decisions and avoiding making the big mistakes that can drag down your long term returns.
Basic Financial Advice
Live within your means, pay yourself first, put money away monthly, use an appropriate well balanced portfolio, re-balance annually, otherwise leave it alone and watch the account values grow.
I may have lost you on the last sentence. But that doesn’t stop many people from tinkering with their investments way more than they need. You may also find emotions leading you to sell when you should be buying, and buying when you should be selling. Common sense doesn’t always win out when it comes to money, especially when the times are great, and even more so when the times are terrible.
The more difficult and complicated you try to make your investments and financial plan the more trouble you risk running into. Working towards your financial goals isn’t easy, but it doesn’t have to be difficult either.
Here are the three big mistakes that threaten to throw people off their road map to financial independence. It will also cost you a bundle.
Mistake #1 – Trying to Time the Market
People in theory know not to try and time the market, yet this seems to be the topic I get questioned about the most. No one can time the market consistently. Market forecasts are like weather predictions. Have you even watched the weather man say zero percent chance of rain, yet you seem to be getting wet?
You have no control over what the market will do today, or in the next few months or even years. But if you are putting money away monthly you will often get to buy more shares on sale. You control what you invest in, and how you invest in it.
Mistake #2 – Freaking Out When the Market Moves
This can go either way. “OMG I don’t want to miss out, the market is going up so fast!” Or “WTF Stock X dropped big today, the world is ending”. You don’t have to be the smartest person in the room to do well with investing, you just have to avoid some of the mistakes other people are making. At this point the biggest mistake people have made in the last decade (and are still making) is panicking from/during/after 2008. Fear from the crash, has kept many people from investing at all, let alone saving the right amounts to meet their specific financial goals.
The market drops, we haven’t had a big drop in seemingly forever, but you should expect a 10% or more drop at some point every year. Even with a tiny fluctuation in the market the 24 news cycle will make it sound like the world is ending. They may be right someday, but as far as it relates to your portfolio- if the world actually does end, how the stock market did that day will probably be the least of your worries.
Mistake #3 – Underestimating Emotions
When the market is hot, everyone thinks they can’t lose. When you feel you can’t lose it becomes much easier to pile on the risk, which increases the odds of your losing big.
When the market is going down, people freak out. It happens, we know it happens. The problem is when you think you can handle the volatility that may come with investments that are more aggressive and more likely to give you a more violent roller coaster ride than you want. Talking about a 10% price drop is one thing, ignoring it is another. I’ve been helping people make smart financial decisions for over a decade. Some of my long term clients who used to get nervous about their investments wondering if the sun will ever come up again after sunset, now seem to take all the daily ups and downs in stride.
I believe a truly diversified well managed portfolio with meaningful contributions is the best way to build your wealth up over the long term. Whether the market is great or crappy this or next year really doesn’t matter that much in the big picture. The important thing is you make smart decisions with your investments and stay on track for your financial goals. If you don’t think you can do it alone, don’t feel bad most people can’t or won’t. Work with a trusted Certified Financial Planner to help craft your financial plan and investment strategy. And let them deal with all the fun and stress that goes with it.
Securities and advisory services offered through National Planning Corporation (NPC), member FINRA and SIPC, a Registered Investment Advisor. Trilogy and NPC are separate and unrelated entities. The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Investment in stocks will fluctuate with changes in market conditions and indices are unmanaged measures of market conditions, it is not possible to invest directly in an index. Past performance does not guarantee future results.
To learn more about David Rae, view his Paladin Registry profile.
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