Firstly, let me say that most of us cannot predict the behaviour of markets with a sufficient degree of accuracy to outperform the market itself. In fact, this leads me to the first of the big 5 mistakes
-1 Trying to outsmart the market by timing when to enter and exit the market.
This is a fools errand. The reason is that it’s well near impossible to predict the absolute peak of the market and the absolute bottom of the market either. The reason being is that the market is not just driven by the performance of the companies or the performance of the economy, it is driven by sentiment. Yes, sentiment drives a great deal of the price movements within the market. Literally, how people feel en-masse determines the price of shares. So to predict the price of the markets, you need to predict how people feel about the market. And not just that, you need to know has the market already priced in these good/bad feelings. Which means you need to know what the underlying fundamental value of these companies are. And even then, you’re not home free. Something can come out of left field like Covid-19, which totally upends our expectations for the markets. What you thought an hour ago is out the window and a new reality has arrived.
Even Warren Buffett, perhaps the greatest investor of modern times, did not try and exit the market at the top. In fact he said;
“…and the lesson about timing is: not only do you not know when to get in, you don’t know when to get out. And when you market-time you got to be right twice. You got to know when to get out and when to get in. And nobody and I really believe this: nobody but nobody can do that.”
-2 Panicking after a crash and selling
This is entirely understandable. Panic is real and a lot of people do it and sell. But what you are really doing is selling at the bottom. You are turning a paper loss into a real loss. What good is it to sell your position when the crash has already happened?! It’s like closing the barn door after the horses have bolted. And even worse, is that by selling, you miss the upswing that comes after every crash. You see, markets tend to overreact in the short term, thus making the crash deeper than it should be. Over time, common sense prevails, and the markets recover some of these losses. But if you sell, you miss this recovery.
If you sold your position in April of this covid crisis, you are in far worse shape than if you held on.
–3 Getting greedy and investing more than you can afford to lose
The reason for this is two-fold. One, you are more likely to make rash decisions with money that you can’t afford to lose. You are more likely to panic sell if things go wrong.
Two, people tend to get greedy at the wrong times. People see the stock market making massive gains and they decide to throw their money in too to get in on the action. The problem is that these massive gains have already happened. We have this blind spot where we think what happened today will happen tomorrow.
In china back in the mid-2000s, people were given work breaks so that they could play the stock market. Some people were paying for shares with their credit cards! Imagine how crazy that is. Credit cards are charging over 20% in interest per year, so your investments must do better than 20% after tax per year before you could make money on that! Bananas! And then bang, the market crashes! Why? Because sooner or later reality matters, no matter what the market sentiment is. These shares were being propped up by people borrowing to buy them. Sooner or later, those credit card bills need to be paid.
-4 Not taking a long-term view on investments
Whilst we can’t know what happens tomorrow in the markets, we know that over a long enough time period, shares and property outperform cash. So by investing in a well-diversified investment fund over a long enough period of time, you should expect to make a return on your investment. If you look at the daily price movements of your investments, you’ll drive yourself insane. You get into the market for a long time and accept that from day to day, anything can happen to the price of your investments. The only thing that really counts is the price you get in at and the price you get out at. The rest is noise.
-5 Not matching your investments with your risk appetite
There is a wide array of different investment funds that carry different levels of risk. The first thing that you should do is understand your risk appetite. This is where a good financial advisor (ahem) will help. By asking you the right questions and understanding your finances as a whole, they can identify the level of investment that you can afford to make, and what level of risk you are comfortable with. From there, they can identify the investment funds that fit your risk appetite the best. The better the fit, the less likely you are to get anxious when markets are volatile so that you can stay the course and avoid the other pitfalls that are mentioned above.
If you’re financial advisor is really good (cough cough), they can do some analysis on these investment funds to identify one’s that they think will perform that bit better. I use some statistical techniques and some cutting edge software to select funds that have historically performed better than other funds of a similar risk profile. #You’reWelcome #ThankMeLater
If you are in the market to make an investment, drop me a line to firstname.lastname@example.org and I’ll organise a free consult with you.
Or, you are already in the market and you need advice I’m happy to help too.
Have you any pearls yourself? feel free to leave a comment.
If you liked the article, share it with your friends and family, by using the share button below.
Wanna catch more of these blogs? like my Facebook page by following the link https://www.facebook.com/JMoorefinancial/