Investing Mistakes

If you are an investor, there are some mistakes that are common to the majority of us.  Investing as in life, there are no guarantees of anything other than uncertainty.  If you were like most of us and were invested in 2008 and 2009 you experienced one of the worst periods ever for investing, regardless of what you invested in during that period.  And now we are experiencing all-time highs in the very same markets that five years ago were hard hit and cut in almost half from early 2008.  Here are some common mistakes looked at and how to possibly avoid making them in the first place.

Do not freak out when the market does fall.  And yes it will drop as it always has no matter when or where you invested.  There are bull and bear markets throughout history provided you open your eyes and look.  And how you react when the markets fall will have a direct impact on your returns.  Many investors did not freak out in the 2008 and 2009 market free for all until the market was at or near the bottom then they got out of the markets.  This is the absolute worst time to get out of the markets as your losses are going to be at their highest.  If you had sold in the spring of 2008 because the markets were falling to a degree, at that time you would have saved yourself some serious pain.  But many people did not see the DOW losing almost half its value in less than a year.  Remember hindsight is always 20/20 so do not beat yourself up.  And in the five years since the bottom in early 2009 the DOW has gained back all its losses and then some to close recently at all-time highs some 10,000 points from where we were in early 2009.  Now I am not saying to try and time the markets because that is a losing proposition as well.  Be patient and pay attention to what the market is doing.  Have an investing plan and stick to it no matter what.  By being patient and having a well thought out plan, you can save yourself a lot of possible pain in your investments.

While it is enough not to get caught freaking out when the markets fall, the same is true when the markets are going in the opposite direction.  Intelligent investors who practice patience will not allow themselves to get caught up in market upticks as well.  Remember I mentioned the investing plan earlier?  That plan will keep you disciplined in both down as well as up markets telling you when to buy and sell.  While the goal is to buy low and sell high far too often it happens the opposite way.  Remember I said many people sold and got out of the markets in late 2008 or early 2009 those same people got back into the markets after they had already seen serious movements up.  Hence, they sold low and were buying high.  Develop an investing plan that will serve you well both in bull and bear markets then have the discipline to stick to your plan.

Are you an investor or a trader?  That is a question you must ask yourself when buying or selling and especially when you are developing your investing plan.  I do not advocate for anyone to be a trader as the odds are against you that you will succeed on a long-term basis.  If you want to invest in a reckless manner chances are you would not be reading this blog on personal finance.  If you want to have the fast success stories of instant riches let me include you in on the secret, those investments are few and far between.  Yes, they happen but more often people lose money when they actively trade instead of developing a long-term investment strategy.  Now I also do not advocate a buy and hold mentality by any means.  Good companies can go bad for a number of reasons thereby making their stocks go from good to bad.  Once you buy stock in a good company you need to make sure you are doing your homework and making sure that the company and its stock stay on the positive side of things.  If you buy and forget then you are also inviting disaster into your returns.

Now I know many financial professionals do not like or even acknowledge Jim Cramer’s Mad Money but he addresses the next issue weekly on his show.  And that are you diversified or not?  It is never good to have all of your investments in one or two stocks or sectors.  Ideally you should be invested in at least five sectors or businesses that are not inter-related or connected.  By doing this, you spread your risks out over a much broader array of investing choices.  Now true this really did not save many people in 2008 and 2009 but if you were diversified in blue chip companies then chances are you lost less than others and have made it all back and then some in the last five years.  By spreading the risk over many sectors in the stock market or better yet over many different asset classes as well, you can achieve stock market like returns with far less risk.

Now that you are properly diversified in your investments it is time also to look at the art of rebalancing.  If you have read many of my blogs, you are aware I am a believer that is rebalancing it essential to overall portfolio health.  If you have done what you should have by developing an investing plan, this will be a portion of that very plan.  If you invest in two asset classes, say stocks and bonds.  Stocks are having a good year and are up big while bonds have not had as good a year and were flat.  Most people would be happy sticking with what they had originally purchased but now the problem is you identified percentages that should be invested in each asset class.  With the stock having gone up so much, and bonds remaining flat, your portfolio is out of balance.  So now you need to rebalance by selling the asset that has appreciated and buy more of the asset that has declined or remained flat.  By doing this, you will lock in gains and have a portfolio that is matched to your investing plan.  As you get closer to retirement or are experiencing some other life event, you may need to examine your investing plan and adjust your percentages for different asset classes.

While there is no one list of all questions to ask or mistakes that have been made this blog does provide you a good starting point and can serve as a reference.  If you have any questions, concerns or just need additional information feel free to contact me.

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