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.
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.