I’m sorry to tell you, but nature has programmed you to be a bad investor. It’s true, investing is counter-intuitive. Your brain wants you to sell when a stock is going down and buy when it’s going up. Even worse, some of the best investors in the world have learned this fact and actually make money by betting against what retail investors like you are going to do. Warren Buffet said it best: “Be greedy when others are scared and scared when others are greedy”.
Don’t worry, there’s hope for you. Here are 12 things you should quit doing when it comes to investing and how to fix them:
- Quit chasing sexy investments. As humans we want to be part of the “In Crowd”. Whether it’s the latest gossip, the hottest style, or definitely the hottest stock – we want in. Facebook was a great example of this. Most retail investors ignored (if they even looked at) the fundamentals and shockingly low earnings to be apart of the hype. How to fix this: Simple, if your uncle, co-working or momma, tells you to buy a stock just because they did – get as far away from the stock as you can. I promise, you’ll hear all about their sexy stock…until the bubble bursts.
- Quit buying or selling after it’s too late. Most of us remember when we had the idea to buy a stock, only to see it go up after we passed on buying it. Then some of us made the critical mistake of buying it after the move already occurred. Fight this urge, it’s too late. How to fix this: If you’ve missed your opportunity, take note but move onto the next investment. However, it’s ok to continue to monitor the investment to see if it drops back down to your attractive buying range.
- Quit 0wning individual stocks. Unless you are an employee of the company and involved in their stock purchase/option program, don’t own individual stocks! Plain out crazy right? No. Individual company stocks have something called “Diversifiable Risk”, or risk that can be eliminated by diversifying your assets. Think of a scandal within the company or their key patent expiring. How to fix this: Target sectors as a whole. Say you like ConocoPhillips because you think think energy will go up. Instead of buying the stock, buy an energy ETF which tracks multiple stocks in that sector (Vanguard Energy ETF, ticker VDE, in this case).
- Quit paying too much in fees. Investing really pays off when your returns start to compound upon the returns you’ve earned the previous years. Every percentage you pay in fees will result in less of a return, ultimately lessening your compounding effect. How to fix this: Only pay a fee when you can answer exactly what you’re getting. Paying a fee to a mutual fund for their expertise in the bond market can be ok. Paying for a mutual fund which replicates the S&P 500, when you can just buy an ETF which accomplishes the exact same thing, is not ok. This is one of the 18 Things I Wish Someone Told Me When I Was 18.
- Quit being too proud to sell. This is a common one so pay attention…Just because a stock went down does not mean it is going to come back up. Pause and ponder this. I’m not saying to emotionally sell when your investment goes down, I’m saying to recognize when the environment has changed and it’s time to get out. How to fix this: If you bet wrong or were hit by an unforeseeable event, cut your losses and move on. There are plenty of other investments out there, don’t let emotion take influence over your money.
- Quit owning too many things. Know what you own! Years of investing can lead to a ‘collection’ of individual stocks, bonds, mutual funds and ETFs. If you’re over 35 years old, I’d be willing to bet that you have more than 10 different types of investments. I’d further bet that you haven’t read the prospectuses, which you receive in the mail, for more than half of them (if any at all). The point is that if you own too many things you can’t effectively stay informed about them. How to fix this: Easy, try not to own more than 10 different investments. Consolidate your mutual funds into a couple that you can follow. This will also help with your problem of ignoring your asset allocation, see below.
- Quit ignoring your asset allocation. A proper portfolio should be balanced between three key asset classes: Cash, Stocks and Bonds. How to fix this: When you’re young you could have an allocation more heavily weighted in Stocks – say 5% Cash 25% Bonds and 70% Stocks. When you’re older (and getting closer to needing the money) you should focus more on bonds – say 20% Cash 60 % Bonds and 20% Stocks. The common theme here is to pay attention to your allocation – it’s tough love, but there is no reason that people in their 60’s should have lost money in the crash of 2008, they should have had a high allocation of bonds (and actually made money).
- Quit targeting too detailed of investments. Unless you are an expert in a certain field, avoid specialized assets. I know it’s so tempting to do things like short the Euro or to buy Gold, but (and I still love you) chances are you don’t have enough time or expertise to be successful at it. How to fix this: Avoid the desire to get into too detailed investments. Stick with a good asset allocation of properly diversified investments.
- Quit avoiding dividend paying stocks. I love dividend paying stock funds – I’d put them on my cereal in the morning if that was even possible. The stock market can go up or down, but I’ll still get my 3% dividend. How to fix this: Consider adding a dividend paying fund to your portfolio (Example: Vanguard Dividend Appreciation Fund, ticker VIG). Funds like this invest in a pool of stocks which offer the potential for appreciation (and depreciation) with the added benefit of a quarterly dividend. In times of stock market volatility, dividends are grrrrreat (yes, that was a pun based on my earlier comment).
- Quit pushing off contributing to retirement accounts. First off, if you’re not contributing at least the amount that your employer will match to your 401(k) you’re losing out on free money. Know that your employer assumes you’ll take advantage of this match, so they pay you less. After you’ve done this, start to look at a company stock purchase program (more free money) or sheltering your income by contributing to an IRA account. How to fix this: Get off your butt, log in to your company site, and elect to contribute to your 401(k). You’re able to get at this money in the future, in the form of a loan or qualified disbursement, so there’s really no reason not to take advantage.
- Quit letting someone else manage your portfolio. Chances are if you’re having one of the big “brokerage houses” manage your funds you’re rarely in communication with them, you’re overpaying in fees, and you’re not invested in anything you couldn’t otherwise buy yourself – and you’re not really getting any powerful advice. How to fix this: Considering opening an account at Charles Schwab or Fidelity, somewhere that you control your own investments. Start with a small allocation and go from there. I really guarantee that you’ll be better off in the long run (financially and mentally) by learning to control your own investments.
- Quit ignoring tax consequences. How many of you are aware that 2012 may be the last year to take advantage of a 15% maximum capital gain rate (and zero percent rate in some cases)? I am. For the past three years I’ve been selling and realizing gains at mostly 0% (resetting my taxable basis). Those gains were then reinvested and will grow with lesser deferred tax liability. How to fix this: First, do your own taxes. With programs like TurboTax out there, any nincompoop can do it. Second, google around for “tax advantages” or “capital gains rates” and you’ll be on the path to learning something new.
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