Why do so many do-it-yourself investors perform far worse than they should? How do you make sure and avoid some of the potholes that most amateurs seem to step in?
In theory, people managing their own funds should do well. Today’s investor has access to more tools, more research, and more information than ever before. You can easily view data in near-real time, putting the average person on par with professional brokers and large brokerage businesses on Wall Street. It’s easy to track company performance, get up-to-date and late breaking information just by opening an app on your phone. What a world!
But, with all this information available, you’ll need to filter out truisms, half-truths and outdated ideas. Managing your own money isn’t tough, but it’s easy to fall into traps.
Let’ s walk through some top myths today’s investors need to realize aren’t true anymore.
First, a diamond may mean forever, but buy and hold isn’t. You shouldn’t just buy a stock and close your eyes. Occasionally, good companies have badly performing stocks. Instead of “buy and hold” investors should “buy and pay attention.” You should carefully select your positions based on the information at hand, but be sure to have a well-thought out exit plan before you buy the stock.
Second, performance isn’t the only thing that matters….and I’m not just saying that because I’m a guy. Historical performance is worth noting, but it’s not, as they say, indicative of future performance. We do believe, however, that performance does persist – there is investment momentum. What matters more than past performance? Simply put, volatility, tax considerations and overall asset allocation should be equally considered. It’s paramount to create a portfolio that compliments your long-term investing goals. Remember that the ones that shoot up fast are also the ones that crash quickly. Volatility is a two way street.
Listen to ways your investments could be more successful on our podcast: 2 Guys & Your Money Episode 15: Top 5 Ways to Improve Your Investment Returns
Third, charts don’t only make sense for professionals. Some people believe only “technical traders” use charts or that they’re somehow outdated relics from a bygone era. Not true. Charts can tell investors a great deal about what’s going on in the markets and with any particular holding. Charts aren’t crystal balls – but they can help you manage risk. How much volatility has a position had in the past? How does today’s price compare with past prices? When does the position pay dividends? How has this position grown relative to its peers? All of these are easily answered by reviewing a few charts.
Finally, don’t try to always buy at the bottom. This one’s really dangerous. How do you know it’s the bottom? Investors are egotistical beasts; we think that because it looks like the stock/bond/real estate/whatever is going to turn around, our few dollars are boing to be perfectly placed. We’ve seen investors buy stocks at $10 that once were $100, only to find out that they were not even close to the bottom. Remember two things: 1) you’re nobody in the market, and your brain is too small to call the bottom of the market (sorry if that offends you); and 2) investment prices fall for a reason. If a position is “on sale,” it’s important to know why it’s fell before you make a bet that it will rise again from the ashes. The person who buys a stock that’s near its yearly low is betting their purchase is going to be the reason it turns around. Unless you’re Warren Buffet, I wouldn’t be too sure.
The biggest rule when it comes to investing is not to try to ”win big” but rather “lose small.” Manage and know your risk before establishing a position and you’ll go a long way toward becoming a more successful investor.
So true that ‘buy and hold’ doesn’t last forever. This burned me when I was a new investor and didn’t cash out when the asset value exceeded the real value of the company. Now I look at things differently and attempt to buy the then stock is undervalued and attempt to sell when it is overvalued. Sometimes this can be a long wait… sometimes shorter…
“The biggest rule when it comes to investing is not to try to ”win big” but rather “lose small.” ” I could not agree more. I’ve spoken to way too many people that don’t want to sell out after a 10% loss because they want to breakeven only to end up losing their shirts. I hate losing 10% too, but I’d rather that than lose 90%. This is where having an investment plan as well as stop orders can be a DIY investor’s best friends.
I was thinking the same thing but John beat me to it. He’s too smart for his own good.
He is WAY too smart. He should leave a few of the Glengarry comments for the rest of us….
As someone who deals with many “amateurs” per day, I’ve seen more people lose money on penny stocks than anything else. I realize that everyone wants to get rich quick, but it’s not going to happen buying some unknown coffee grower in Venezuela. I wish investors would just leave those stocks alone.
What most of those people don’t understand is the lack of regulation because they’re pink sheets. I had a client who insisted on buying penny stocks, even after I explained this. After watching two companies suffer from investor manipulation and die, he finally agreed that it wasn’t a great idea.
A made $30k over 2 months (then quickly lost it all) in a penny stock some 6-7 years ago. It was really stupid and I’ll never mess with those things again!!
That stinks. I bought XM at around 3, rode it to $30, then bought SIRI and GM preferreds with the proceeds. I know better…..
I have to agree with Average Joe. I was never the type to fall victim to those email scams you see going around, the most recent would have to be USGT. Total disaster and you’ve got to wonder what the guy was thinking who bought the top of that.
Still though, despite that lack of regulation, it’s the ‘get rich quick’ mentality that prevails and pushes people into risky trades with companies that have no business being listed anywhere.
Well voiced on the aspect of holistic investing and a sure solid path of getting the best from it. A notable fact I observed is that Today’s investor has access to more tools, more research, and more information than ever before but yes he is not taking the best from it or either draining from it.
The best strategy that a person can do to get the best of his investments is to go for a diversified investment one and invest in a combination of both savings and insurances as they help you save a lot on taxes as well.
However what he does not need to forget is that there are aplenty of saving aggregator/insurance aggregator sites out there which displays the best term plan/ saving plans available which will help the user in getting the best from it thereby helping minimizing his risk & getting the best of his investment.
A tip here is to avoid peer recommendation as perceptions vary from buyer to buyer.
I think there’s definitely an element of information overload for beginning investors today. 50 years ago, you had to get a copy of the 10Ks, read through them, decide if you knew and liked the company, and go for it. But today, there is so much more information available and to absorb that I think it’s a big hurdle for most small investors.
In fact, for us, that’s largely why we’re in diversified mutual funds for now. We don’t feel we have the time or inclination right now to be keeping up with a lot of individual stocks, so we let someone else do the rebalancing within the funds in order to keep the mutual fund allocations correct. Someday that will probably change, but we’ve been spending our time learning about other things like real estate the past few years. =)
Much better idea for people who’s attention is elsewhere. As an aside, even mutual funds aren’t “buy and hold forever.” You know that, Mrs. PoP….just explaining to readers. I’ve seen great funds change managers and go through years of mediocrity (for example, Fidelity Magellan after Peter Lynch left).
Even the professionals make mistakes! You are right losing small is a good thing. I would like to think my asset allocation misses out on the huge losses and probably big wins. I am okay with steady reasonable growth.
I’ve made mistakes on investing, but thankfully they didn’t hurt me too much. Learn from your mistakes and try not to make the same mistake again.
Learn from your mistakes is a huge point, Brent. I got in the habit of actually taking a spiral notebook and writing my investment mistakes. Over the course of several years, I developed a playbook of what to avoid when investing. It’s helped me a ton.
The hardest part of investing can be learning when to get out of your own way. As human beings, we are emotional, impressionable, and often a lot less savvy when it comes to investing than we think. That can spell disaster for portfolios. Following everyone else to buy up “hot” assets is one of the surest ways to get burned. In addition, overconfidence is often cited as a reason that men tend to perform worse than women in long-term investing.
Those are really great things that investors should avoid. I agree with them all, especially the buy and hold isn’t forever one. Buy and hold as long as it makes sense!
I don’t remember the exact statistics, but of the 100 biggest companies 50 (or was it 100?) years ago, only a certain percentage remain in existence today. Buy and hold forever does not make sense if you are only investing in a few individual stocks. Sometimes it makes sense to buy and hold….and sell!
I remember reading about some real estate investors who thought they were buying Detroit homes at the purported bottom. It was unthinkable (at least to these investors) that a house formerly priced at $150K, now purchased at the bottom-fishing price of $20K, could sink even further. But it did.
This is something really valuable.Thanks and keep sharing.
Here are tips for charting:When an upward trendline or channel has been established it could represent a buying opportunity, or a reason to hold on to your existing investments. Any sign that this trend could be broken would then mean that an investor should stop purchasing look at their portfolio closely. The longer a trend has continued the more likely that any break in the upward trend could lead to a difficult period for the share price.
I really like your comment, “Charts can tell investors a great deal about what’s going on in the markets…” That is the absolute truth. Charts and graphs reveal data visually and without emotional attachment. Additionally, data comparisons can reveal trends, gaps and growth areas that just looking at the simple numbers would never reveal. For example, check out this infographic on the real estate market in Atlanta and see what I mean. Atlanta real estate market infographic