When it comes to investing your money, many people think they know best. They're often very wrong.
As a healthcare provider, you’d likely either laugh or cry if you learned of a financial advisor performing any kind of clinical procedure. Most of us who aren’t healthcare providers would never even think of doing such a thing. But when it comes to investing your money, many people think they know best. They’re often very wrong. Let’s take a quick look at some of the common mistakes even experienced investors can make.
Do It Yourself?
DIY can work fine for painting a room or placing tile, but it often gets investors into trouble. Why? Because in finance, like in medicine, knowledge is power. The ubiquity of day-trading sites and all the stories from your sister-in-law’s friend’s cousin getting in on the IPO of Google make “playing the stock market” sound easy. It’s not. Markets are cyclical, business success can be fleeting and is difficult to predict, and trying to “time the market” has been the grim reaper of many a portfolio.
Working with an experienced, knowledgeable professional can save you from some bad decisions, such as cashing out of a stock too early, or holding onto gains past the goals you’ve set and ultimately losing them. Perhaps more importantly, it can keep you from one of the biggest mistakes of all: staying on the sidelines instead of making regular investments or re-investments.
Counter-Mistake: Working with the Wrong Advisor
So, if going it alone rarely works, you should work with an advisor, right? In many cases, yes, but this has its risks as well. Many brokers earn commissions based on the number of transactions they conduct, not the results of those transactions for the investor. Before working with a consultant, advisor, or broker, get into the details of what you’re paying them for, how much you’re paying them, and, importantly, when you’re paying them. Make sure your advisor doesn’t have conflicts of interest that could compromise your portfolio.
A good financial advisor will recommend nothing until he or she has a complete picture of your financial status and goals. Anyone willing to “hit the ground running” with investment advice from the get-go likely isn’t putting your financial well-being at the top of the priority list. Don’t let any advisor or broker tell you what your financial goals should be. That’s your role.
Relying Solely on Past Performance
Former New York Yankees manager Joe Torre would always respond to criticism of a slow-starting hitter by saying, in essence, “At the end of the season, he’ll hit about what he always does.” This was typically true in the case of Derek Jeter, but it may not be so for that mutual find or solid-performing stock you’ve been holding forever. (How’s that Blockbuster stock holding up for you?)
Past performance can certainly be an indicator of how a mutual fund or stock will perform in the future, but it’s but one of many factors you should consider in your investment research. “But it’s always performed well” is a common lament of many a stagnating portfolio.
Sloth is one of the 7 deadly sins, and sitting on the sidelines while your savings earns a pittance in a savings account is a bad move. But greed and gluttony are deadly sins as well; constantly buying and selling in an effort to make the little profits add up is more often than not a very bad strategy. First of all, even if you’re trading yourself, there are per-transaction fees to consider. More importantly, the goal of your investment should be long-term, steady growth. Choose stocks you believe in based on their business model, long-term profitability, and fit with your overall goals as an investor. Then ride out the daily, weekly, monthly, and even yearly cycles that can temporarily keep a good stock down.
Conversely, don’t assume that because a stock continues to perform well, it will continue like this in perpetuity. The fear, of course, is that you’ll sell a stock and then see it rise to a series of all-time highs. But selling at an established price point, and then reinvesting those funds, can improve diversification and give you a chance at long-term, sustained growth.
A Final Word
Even the most successful investors hit rough patches. But investing in the wrong stock (or at the wrong time) doesn’t have to cripple your portfolio. Some people liken investing in stock to gambling. Those people are doing it wrong. Gambling is a zero-sum game where the house edge means that over the course of time, you’re going to lose. Wise investing, if you can avoid some common mistakes, is nothing like that.