How To Be A Bad Investor

by Krantcents · 26 comments

Post image for How To Be A Bad Investor

Making mistakes is a part of being human. We all make them, sometimes at the most inopportune times, such as my friend getting into an accident while taking the road test for his driver’s license – that’s not a joke. When it comes to investing, there are countless mistakes that we as investors can and do make. Below I present three ways to be a bad investor and what to do instead so that you can be a successful investor.

Bad Investor: Not Having a Plan

When I first started investing, I did what most first time investors do. I looked at a bunch of mutual funds to see which ones crushed the market last year. After narrowing the list down to the fund with the biggest returns for the previous year, I wrote a check and invested in the fund. If after a few months I hadn’t tripled my money, out my money came and into the next best performer. Over and over this cycle would repeat itself. Was I ever successful? Not really. Why? Because I didn’t have a plan. I just threw my money into mutual funds hoping for a great return.
It amazes me how many people don’t have a plan when they decide to take their hard earned money and invest it in the stock market. If you invest in the market without a plan, you are setting yourself up for failure. Without a plan, you will most likely pick and choose some stocks and then hope that they increase in value. After a few short weeks, if you haven’t quadrupled your money, you sell out of the holdings and pick other stocks that you’ve been hearing about in the news. Rinse and repeat.

Successful Investor: Have a Plan

Having a financial plan will help you not only identify investments that you should invest in, it will also help you to stay focused and not give into “the noise” or market volatility over the short term. For example, if you are investing for retirement, which is many years into the future, you can invest more heavily in stocks as opposed to bonds. Likewise, if the market drops next week, you can refer back to your investment plan and remember that you are concerned with what the market is doing years from now, not right now. As a result, you will stay invested, lowering your trading costs and allowing time and compound interest to work their magic.

Bad Investor: Investing Emotionally, Not Rationally

Our emotions are what get us into trouble when investing in the market. We sense desperation and sell or we sense exuberance and buy. Our emotions cause us to buy and sell at exactly the wrong times. When I was younger, during the dot-com boom, I got caught up in the excitement of the market. I took my hard earned money and invested in a tech mutual fund, simply because it returned 50% the prior year. I was expecting to double my money in two years! What happened was I lost most of it in less than one year.
When you let the daily news and other people’s opinion about what is happening or is going to happen in the stock market influence your decisions, you will not be successful.

Successful Investor: Investing Rationally, Ignoring Emotion

If you can learn to remain rational when the news and magazines tempt you with their stories about the market, you have won the battle. Understand that short-term volatility will always be present, but the long-term trend of the market is up.
Also understand that personal finance magazines and the 24-hour financial news channels need to make money. They make money through getting people to watch their programs so they can charge advertisers. If they don’t hype up stories, or have stories for that matter, no one will watch and they will in turn not make money. They want you to react and get emotional. Realize their plan and work hard to not give in to emotion.

Bad Investor: Listening to “Experts”

I hate to pick on the media, but it has to be done. Turn on the 24-hour finance channel or open the new issue of your finance magazine and boom, they tell you to buy ABC stock. What are you waiting for? Here is an expert telling you what to buy! What can possibly go wrong? There are two problems here.
The first problem is that no one knows what the market is going to do. Their expert recommendation has as good of a chance of doing well as yours or mine. They may study the company more than you or I and understand the financials, but at the end of the day, they still cannot tell you if the stock will go up or down.
More importantly, the “expert” has no clue as to what your situation is. That stock recommendation may be the complete opposite of what you should be investing in. Just because they recommend it, it doesn’t mean that it is right for you.

Successful Investor: Deciding if Expert Advice Makes Sense For You

Before you act on any advice an “expert” provides you, refer back to your investment plan (how convenient!) and then decide if it is a fit for you. If you determine that it is not, then simply ignore the advice. It might be great advice, it’s just not for you.
Another way to put this is this: A guy at the gym might instruct you to add more weight to the bar so you can build more muscle. That is great advice, if you are trying to build more muscle. If you are preparing for a marathon, building muscle is not your plan.

Summary

By simply having a financial plan, sticking to it, ignoring your emotions and not listening to so called “experts”, you will be a successful investor. Investing seems complicated because there is so much information out there on the subject. When you strip away all of the noise, you are left with the core principles of investing. As long as you follow these core principles and tune out all of the noise, you will be well on your way to investment success.

Photo by:  David Castillo Dominici

Author biography:   Jon writes for MoneySmartGuides, a personal financial blog that helps people overcome their debt and start investing in their future. He is the author of three books, including Seven Investing Steps That Will Make You Wealthy, currently available on Amazon.

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{ 25 comments }

Nick @ Step Away from the Mall December 17, 2013 at 7:29 am

My biggest blunder at the beginning was not having an exit plan. I bought stocks and other things but then didn’t know what to do with them. It definitely made me a better investor to have a plan from the beginning.

Krantcents December 17, 2013 at 8:33 am

I think when you invest you need a strategy which includes an exit plan. I usually buy for the long term and rarely sell, but I may have to alter that plan/strategy when I retire in 3-4 years.

Michael | The Student Loan Sherpa December 18, 2013 at 4:11 am

Having an exit strategy makes a lot of sense. What other factors and considerations should be in your investing plan?

Krantcents December 18, 2013 at 9:33 am

Investing is personal and you need to determine what factors are important to you. For example, I tend to buy and hold. I pick high quality stocks and stick with it.

Jon @ MoneySmartGuides December 17, 2013 at 6:46 pm

When I first started investing I was just buying random stocks and funds myself. I didn’t start to get good at investing (i.e. make money) until I set up a plan and followed it.

Krantcents December 17, 2013 at 6:49 pm

I agree! A little planning solves so many problems and makes better decisions.

Tie the Money Knot December 17, 2013 at 8:47 am

Absolutely agree that emotion should be taken out of the equation. What we feel, wish for, crave, personally value, etc – means nothing in terms of what we invest in. That is, if we’re concerned primarily about investment returns, which most investors probably are.

Krantcents December 17, 2013 at 11:48 am

I try to take emotion out of most decisions. When I bouht my first house, I looked for a fixer so I could save money. The fllor plan and amenities were important, but I wanted a lower price.

Jon @ MoneySmartGuides December 17, 2013 at 6:48 pm

We never make good decisions when we are emotional. It doesn’t matter if it is with money or relationships. The best thing you can do is to step back and take a deep breath and come back to the issue/situation when you have calmed down.

Michelle @fitisthenewpoor December 17, 2013 at 9:45 am

This is a very helpful post. As someone who’s new to investing, I think it’s important to note things like taking emotion out of investments and using “experts” as a starting point, not a stopping point.

Krantcents December 17, 2013 at 11:52 am

I just invested in a stock. I started with biorech companies and started my research with stock scouter and reading the analyst information. I used th eexpert information along with my criteria to make an unemotional decison.

Jon @ MoneySmartGuides December 17, 2013 at 6:49 pm

Expert advice is good if you know how to take advantage of it. You just can’t take it as face value and think it fits with your goals and plan.

Krantcents December 17, 2013 at 10:05 pm

I use expert advice (analysts) and other object information all the time.

The First Million is the Hardest December 17, 2013 at 6:28 pm

Learning to leave emotions out of investing is the #1 thing I think most people struggle with. It’s what leads to buying in bull markets and selling off at the bottom in recessions, the exact opposite of what we’d do if thinking only rationally!

Krantcents December 17, 2013 at 6:48 pm

I think emotion should be left out of most decisions when it comes to money! I think the best way to handle it is by setting limits before you think of buying or selling.

Jon @ MoneySmartGuides December 17, 2013 at 6:51 pm

Very true. You see bad decisions in life when emotions are involved, regardless of the situation.

Krantcents December 17, 2013 at 10:06 pm

I try to keep emotions out of my decisions. It is easier when you set up criteria that are objective.

Get Smart December 17, 2013 at 10:37 pm

You can read capsule reviews of companies that offer plans. And you can use the investing strategies we’ve uncovered to maximize the advantages of DRIP investing.

Krantcents December 18, 2013 at 9:30 am

There are many sources of investing information. It is up to you to find ones that work.

Ben @ The Wealth Gospel December 18, 2013 at 4:58 am

Great post. A co-worker told me the other day that she planned on investing in Japanese stocks and tech stocks. I asked her about her experience in stocks and she said she had none. I told her that she may want to spend some time doing some research, especially before investing in foreign stock because there are additional risks associated there. She seemed surprised that it wasn’t just as easy as a click of a button…

Krantcents December 18, 2013 at 9:51 am

Taking the time to learn about investing is important. The alternative is to just pick a very broad mutual fund such the total stock market index.

Justin @ RootofGood December 18, 2013 at 12:33 pm

Best piece of advice in this article: Ignore emotions.

Do you really want your emotions this minute determining your investment results for the next 3, 4, or 5 decades? Of course not! Set up your investments to run automatically as much as possible. You’ll make less emotional decisions that screw up your investments, and you won’t suffer the emotional pain of making the wrong choice.

Automate your monthly investments to the extent possible and ignore your portfolio as much as you can. Just keep your hands off!

Krantcents December 18, 2013 at 12:54 pm

Good point! Automating your investments removes a lot of the emotions. Whether it is investing or something else, you should always put aside your emotions because it usually clouds your judgment.

maria@moneyprinciple December 18, 2013 at 3:39 pm

Interesting! I mostly agree with your points, Jon, except the one about emotion. I simply don’t believe that emotion is possible to leave aside (and for the record I am slightly Aspie :) ).

Krantcents December 18, 2013 at 3:52 pm

I think you need to separate emotion from your decisions. When people make decisions emotionally, it probably not a sound decision.

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