I saw some good things, like the 20-something investors with $300,000+ in their account thanks prudent saving. I also saw some real doozies that still make me cringe. No one is perfect, and we all make mistakes. That's a given. It's the foolish mistakes that really impact the bottom line.
Here are five foolish investing mistakes I saw everyday as a stockbroker that get the best of us.
1. CHASING PERFORMANCE
Investing in the stock market is a numbers game. You want to see a return otherwise you're treading water at best. Countless times I would hear investors say, "I've only seen X% return in the past quarter!" and want to jump ship. This short-term thinking often gets you nowhere and brings added commission costs.
We don't like to admit it, but it's often the boring buy and hold strategy that serves most investors best. A 2014 Vanguard study bears this out, revealing that across nine different sectors, each one reported a better return for those who bought and held vs. those who chased performance.
As tempting as it is; don't solely look at the most recent performance. Rather, look at how the investment works in relation to your overall investment plan.
"Performance-based plans are only as good as your last statement. What happens when the performance doesn't perform. This turns into taking more risk in the portfolio than your own risk tolerance allows," says Kenneth Feyers, founder of Safety of Principle Wealth Management. Whether working with an advisor or managing investments on your own, focus on the long-term, not the day to day.
2. THINKING YOU CAN BEAT THE MARKET
The twin sibling of chasing performance is believing you can time the market. In many cases, market timing results in investors selling low and buying high – the opposite of what we should be trying to accomplish. As the Peter Lynch quote goes, "There are no market timers in the 'Forbes 400,'" yet the appeal draws many investors who think they can time the market.
3. LISTENING TO THE MEDIA
The media may be fodder for a good laugh, but in most cases, they're simply that when it comes to investing. "By far the biggest mistake I see today is letting the media dictate how you invest. While the media is loud and comes from every direction today, they simply don't know what's in your best interests," says Clint Haynes, CMFC® of NextGen Wealth.
Many in the media sound like they know what they're talking about but in reality they know nothing of your particular situation. This is why it's so important to take what we hear in the media with little credence. As Haynes points out, "...let your personal goals dictate how you invest; not the person on television who's simply looking for ratings."
4. NOT BEING PROPERLY DIVERSIFIED
Proper diversification is a hallmark of sound investing. Sadly, too many think picking a small handful of stocks means they're diversified, without realizing that they're opening themselves up to significant risk.
On the flip side, many investors think that because they invest in mutual funds or Exchange-Traded Funds (ETFs), they're diversified. Little do they realize that if they don't look at what those funds hold, they could own a group of holdings that leaves them more open to risk than they realize.
The same thing can happen when you work with an advisor. You may get a product, but it's not a plan based on your needs. "Just throw a couple of mutual funds together, add an annuity, sprinkle in a few stocks.....and you have the perfect portfolio. Until next year when this isn't really what I wanted," says Feyers, revealing the point behind diversification – coming up with a plan that's built for the long-term with many conditions and your particular situation and goals in mind.
5. IGNORING YOUR INVESTMENTS
Ignorance can cost investors thousands of dollars in wasted money. Whether it be a corporate action or price plummet, if you never check on your investments, you can lose big.
However, checking in on your investments too often leaves you open to making emotional decisions. How often then should you check in on your investments? Garry North, Managing Director/Partner of Master's Advisors puts it best. "Checking up on your accounts when you get quarterly statements is a good habit to keep, but don't make investing decisions based on account values; make them based on your financial plan." While there is no set timetable to check in on your investments, once a month, quarter or some other interval serves most investors best.
It's inevitable that we make mistakes. Take the mistakes as opportunities to learn and grow your portfolio in the right direction.
"Are you on a laptop all day? Would keeping an excel file or Google doc file help you track your expenses easier? Would it be more convenient to keep an old fashioned pen and paper type of budget? How about keeping a running tab on the fridge so that you are tracking all expenses?
"For the few that actually look at their goals again, it’s common to revisit them only at the end of the year. This is a crucial error. As our circumstances may change day to day and month to month, so will our goals. A lot can change in twelve months, which is why I propose reviewing once a month, or at the very least every three months.
Revisiting also keeps our desires relevant. It’s helps us remember that we even have them. Ideas aren’t enough, we must execute.
As the great Thomas Edison said, 'Vision without execution is hallucination.' " -Jiu-Jitsu Finance
Increasing your income
"After you have lowered your expenses, it is time to bring in more income. There are many ways to bring in more income especially during the holiday season. Maybe your full-time gig will let you work extra hours for overtime. In addition, retail stores typically hire for the holiday season. That part time holiday gig could turn into a longer gig...
Retail jobs aren't the only part-time jobs available. There are plenty of other side hustles you can pick up right at home to make extra money like: Freelance Writing, Virtual Assistant, Social Media Management." -Financially Fit & Fab
Turn on your automatic savings
"Another no-hassle way to save is by setting up an automatic transfer to your savings account. By automating your transfer, you're making sure that you don't forget or pay your savings last–and as a bonus–automating your savings means you never "see" that money and subsequently makes it sting a little less.
Two new apps that I am loving lately are Digit (which has a cult following). It automatically transfers money from your checking account you won't miss. I also love Qapital, which has rules you can set to "save the change" from your purchases. I saved over $75 my first month of Qapital, which was really astonishing to me. Click here to give it a try." -Financial Best Life
Develop the habit to spend with cash than card
"To spend with cash is also an actionable way to get out of debt. According to the research on peoples spending with credit cards; it was revealed that those who shop with credit card are impelled to spend more on luxury items because they feel they are paying with “play or fun money”. In other words, people who shop with credit card spends more than required.
Evidently, finance advisors hold a strong stand on this. They strongly advise that people who are working on eliminating their debt should cultivate the habit of spending cash, to avoid being tempted to spend on irrelevant items." -MoneyMiniBlog
Leave your wallet in the car when shopping
"This trick is simple but impactful. When doing any kind of shopping, use cash, and only take the amount of money you want to spend in the store with you. Leave all other cash, credit cards, and debit cards in the car.
This is very powerful, especially when grocery shopping. In addition to the amount you plan to spend, you can consider bringing in a small cushion of a few dollars (in case there are hiccups at the register). You will shop (and spend) completely differently when you only have a hundred dollar bill with you versus a hundred dollar bill and your debit and credit cards.
Don’t give yourself a way to spend more money than you want to — and you won’t." -Hope + Cents
Start and maintain an emergency fund
"There is no fixed formula for how much you should have in an emergency fund. Some school of thoughts say 6 months’ worth is sufficient, some say a year’s worth. Everyone’s situation is different and as such, each strategy should differ. To start however, I would suggest understanding your spending habits, and then implementing a 3-6-9 guideline.
3 Months: If you are single without kids, renting, no car, partially dependent on parents for income or any combination of these factors, start off with a target of 3 months’ worth of expenses for a rainy-day fund.
6 Months: Married, kids under 18, own a house or condo, own at least one car, or any of these combined, the base target should be 6 months’ worth of expenses (if married, base it off the income of the highest earner).
9 months: Self-employed, freelancers, anyone with a volatile job or unpredictable paycheck, 9 months’ worth should be the benchmark." -Investment Conversations
How students should avoid the debt trap
"The easiest way to prevent yourself from falling into the debt-trap is by living within or below your means (that is, not overspending). In addition, it is necessary to do research before getting credit cards (or signing any contract to take on loan/ debt) so that you really understand how it works. As a student, you must learn to treat your credit card with respect." -Investment Conversations
Build a budget and stick to it
"There are many free apps available to help you track expenses, but I always prefer using my own spreadsheets. That enables me to have the most control over what I’m doing. I understand that being able to access your spreadsheet on your phone makes tracking significantly easier, which is why I prefer Google Sheets over Excel. You can download the Google Sheets app and pull up your expense tracker wherever you are to input a transaction or monitor your spending. By combining the expense tracker as separate tabs within the same spreadsheet as the bill tracker, you can have all your finances in one easy-to-access location." -The Budget Boy
Create an automatic savings account for travel.
"Here's how this automated system specifically works for you and your travel fund. Once it's set up, it goes like this:
-Your checking account receives income.
-The next day, your checking account automatically transfers money to a separate (different bank) savings account—aka your travel fund.
Know Your Interest Rates
If you have anything that you are making payments on every month, you need to know how much interest you're paying. Make sure you know these numbers, too. Ideally, you'll want to pay debts down that have a higher interest rate first. However, there is another school of thought out there that suggests paying the bill with the lowest balance first. I'd say either way is fine as long as you're making progress and as long as the higher interest rate stuff isn't astronomical.
Action: Look at your statements or call the companies to get your current interest rates on all monthly obligations.
Negotiate Lower Interest Rates
If, by chance, you ARE paying astronomical interest rates on any of your liabilities, call and try to negotiate a lower rate. Oftentimes, if you've demonstrated a history of paying on time, the company will work with you to reduce your rate. The only trick is, you have to ask.
Action: Know your numbers and call the companies to negotiate if you're paying high interest rates.