Investing in Stocks can seem very speculative and dangerous to people that don’t understand how it works. If you have an investment coach that helps you to invest in a globally diversified portfolio, then you have avoided the 3 big mistakes in investing. The 3 signs you are gambling and speculating with your investments are stock picking, market timing, and track record investing. I will go over the detriment of each one briefly.
1. Stock Picking
Stock Picking is when you, or your advisor, think that you know exactly which company stocks are going to go up, and which ones are going to go down. You think you know who the next Google is going to be. First of all, let me tell you why this is not possible.
There are so many bullies on Wall Street and investors throughout the world that are buying and selling stocks each day for different reasons. There is no way for you to predict the way every investor will feel about a company stock. There are also random events and economic news that can effect individual stocks in a big way. Unless you have a crystal ball and can predict the future, you cannot pick winning stocks continuously.
Now let me tell you why stock picking is so detrimental to your portfolio. Every time you buy and sell a stock, there is a cost associated with that. Also, if you are stock picking, you are most definitely not diversified, and are increasing your risk astronomically.
2. Market Timing
According to Investopedia, market timing is “The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data. ” 1.
If you have ever watched any of the financial channels on TV, or been on a financial website like Yahoo Finance, they are constantly promoting Market Timing. Every day I check Yahoo Finance there is some new trend that somebody has predicted in the market. One day they say, this bull market is just getting started. Then the next day they say, indicators say that market is in for a huge downturn. Which one should we believe, or would our retirement portfolio be better off if we just avoided the market timers opinion?
Market timing has shown to be a huge detriment to your investments. In a study done by Dalbar, the average investor over the last 30 years has gotten beat by the S&P 500 by over 7% per year. The reason for that is because these investors got in when the market was doing well, and got out when the market was going down.
To better explain why market timing can kill your portfolio performance check out this chart explaining the growth of wealth for the last 20 years, if you stayed invested vs if you timed the market. 2.
You can see from the chart that if you stayed invested for the last 20 years, your money would have grown close to 5x. If you pulled your money out for even 5 of the best days during that time, your return would be about $15,000 less according to this depiction. And then if you look all the way to the right, if you missed the 30 best days, you lose any return at all.
3. Track Record Investing
Track record investing is thinking that because a mutual fund manager was able to beat the market in the past, he will be able to do it again in the future. If you are looking for a mutual fund, doesn’t it seem right to find one that has beaten the market for the past few years? That is why this form of speculation can be the hardest to avoid.
Studies show that mutual funds that have done well in the past, are very likely to under perform in the future. Track record investing is basically just believing that a mutual fund manager can beat the market through methods such as stock picking and market timing. If you believe in one, you are lured into the other 3 big mistakes.
If you can avoid doing these 3 things, you have taken out a big portion of the risks involved in stock investments. The key is to stay disciplined and work with an investment coach that educates you and gives you peace of mind.
By Jimmy Hancock
1.”Market Timing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 16 June 2014. <http://www.investopedia.com/terms/m/markettiming.asp>.
2. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PPT.