By: Vincent Mortensen
Lots of people are terrified when it comes to investing in the stock market. Interestingly enough, the market has averaged about 10% over the past 100 years. This includes two world wars, numerous recessions, hyperinflation in the 1970’s, the September 11th terrorist attacks, and the housing collapse of 2008.
A study in Ray Levitre’s Book, “20 Retirement Decisions You Need to Make Right Now” shows that in the past 20 years, the average investor had a return of only 1.87% a year (1989 – 2008). Why is this happening if the market is averaging almost ten times that amount? Below are the ten most common mistakes investors make that drastically lower their returns.
- Excessive Buying and Selling – Investors that trade frequently more often than not will underperform the market compared to those that simply leave their investments alone.
- Information Overload – Studies have shown that investors who are regularly checking how their investments are doing will more likely panic when they go down vs. those who check their investments every few years. This leads to excessive buying and selling mentioned above.
- Market Timing – Many investors find it exciting to guess when the market is going to go up and down. Unfortunately for them, this is nearly impossible to do. If an investor was to only miss the 10 best days in the S&P 500 Index fund from 1984 to 2008, they would have returned only 4.10% compared to 7.06%.
- Chasing Returns – Many investors are famous for purchasing last year’s winners. More often than not, last year’s winners will be this year’s busts so be careful.
- Believing Persuasive Advertising – In our technology era, companies will do almost anything to get your business, even if they don’t have the best options. Do your research and find which investments are truly best.
- Poor Diversification – Not diversifying properly will raise the risk of losing one’s money. For example, if an investor had $100,000 Lehman Brothers stock in 2008, their portfolio would have only been worth $820 after all was said and done. Ouch.
- Lack of Patience – Most funds and equities are held for an average of three years. Remember, investing is a long-term process, so do not panic if you are not doing well. Look at the big picture.
- Not Understanding the Downside – Some investors believe their portfolios will go up, and only up. They are in for a rude awakening when the market moves into a recession. After this happens, the investor will tend to sell their stocks and re-enter the market once it’s “safe” again. This will have dire rate of return consequences.
- Focusing on Minimal Portions of Portfolio – Some investors will be spooked when a small portion of their portfolio is drastically getting beaten. Because of this, they will sell all of their assets and move to more conservative options (even though the rest of their portfolio is doing quite well). Once again, look at the big picture.
- Lack of Investment Strategy – If you do not know where you want to go, can you really get there? Create a great investment strategy to make sure you are as successful as possible.