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.