When the markets experience such a positive year, as they did in 2017, investors rejoice in their smart asset allocation and strategy. But good market years make even the rookie investor look savvy. But investing is a long game – investment strategies that grow your income and wealth over a 40-year period require calm, sober patience. While investing mistakes are common, most are completely avoidable with the proper advice and guidance of a wealth manager or financial advisor. No matter how well your portfolio performed in 2017, consider these common investing mistakes.
Mistake 1: Investing without a plan
Without a well laid out plan, your investments can have you end up in a place not intended – usually with not enough money to do the things you had planned (i.e., save for that first house, retire comfortably, etc).
We have many clients that come to us and do not know how much they spend. They don’t know what they own. They don’t know what their assets are and they have no idea how much they will need to live. It is important to establish an overall plan to determine how much you will need during your lifetime and then stick to it. Working with a financial professional can help you determine your goals and make sure you are on the right track to reach them. Your long-term goals will inform the type of investment strategies you should use.
Mistake 2: Taking excessive risk with money you cannot afford to lose
With speculative investments in the news every day, it is easy to get caught up with those telling you about making a quick buck. The craze makes it easier to want to invest in the latest “tip” you hear at a party. Our philosophy is to carefully evaluate each investment and determine how much risk you are willing to take. As a firm, we also don’t recommend that investors speculate just for speculation’s sake. Dividing your investments so that you have money to spend on day-to-day expenditures and money to save for long-term use can help you determine how much risk you can afford to take.
Mistake 3: Trying to time the market
For over 30 years, I have been investing for clients and I have never met a client or a manager that can repeatedly time the market. Yes, a few managers have gotten lucky from time to time, but longer term, it is very, very rare. It is therefore best to stick to a solid investment plan that takes into account your cash needs, your tolerance for volatility, and your time horizon. Once you set a plan, stick with it – even when the market takes a dip.
Attempting to time the market for lucrative short-term gains creates a situation where your investments may actually miss the best-performing days. Below is an example from the S&P 500’s performance between 1997 and 2016:
Source: J.P. Morgan Asset Management Analysis using data from Bloomberg. Returns based on S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data as of December 30, 2016.
Six of the top 10 days of trading on the S&P 500 occurred within just two weeks of the 10 worst days. If you had tried to time the market and sold a stock during that period, you would have missed out on potential “recovery” days, ultimately preventing you from recovering some of your losses.
Mistake 4: Putting all your eggs in one basket
Just because you hear that Apple, Google (Alphabet) or Amazon are amazing investments and continue to climb doesn’t mean that you should pick one and invest all your money in it. It is important to spread your investment among various stocks and among various asset classes (stock, bonds, cash, real estate, etc.). And, you also need diversification within each asset class. A financial advisor can help you determine what percentage of your total portfolio you should allocate to U.S. stocks, international stocks, U.S bonds, international bonds, etc.
Mistake 5: Thinking Short Term
Many investors have been watching the markets very closely over the past 8 years and may be wondering how much longer such uninterrupted growth can continue. This investor may conclude that it is too late to get in on the post-recession recovery. If you are young and starting out, what the market does next year or the year after should not deter you from investing. Many investors use 401k plans or other retirement accounts to save. In this way, you are dollar-cost averaging with every paycheck. Whether the market goes up or takes a hit, the longer-term performance is what will matter.
And, even if you are nearing retirement, your life expectancy is another 20 or more years. If you are planning to leave an inheritance and the money will go to future generations, your time horizon is much longer. Allocating your assets correctly – having enough money for short term expenses and investing for longer term goals – will allow you to think for the longer term and not focus on the day-to-day fluctuations of the markets. Work with your advisor to ensure your investment allocations are appropriate for your risk tolerance and your time horizon.
Mistake 6: Focusing Exclusively on Taxes
Investors frequently express to us a desire for a particular investment because it will assist them in lowering their taxes. We’ve also seen this expressed in an occasional hesitance to sell appreciated stock or rebalance a portfolio, all from the desire to avoid taxes. We try to stress that the success of an investment portfolio should not be measured by what taxes are paid, but what an investor keeps after tax. We look to invest to grow a client’s wealth, and to us that means identifying the best outcome after taxes. At the same time, many common strategies do incorporate some form of investing tax efficiently. For example, investments that will throw off a lot of income can be put into retirement accounts where they can accumulate tax free, or tax-free bonds can be incorporated when the after-tax yield favors them over taxable bonds. But we won’t shy away from taking gains when appropriate and have our clients pay the tax.
Mistake 7: Confusing Historical Returns with Future Expectations
Many investors get into the trap of chasing performance. They see a great stock or a great manager and think that since it is doing so well, it will continue to do well in the future. Since no investor wants to miss out on great performance, they jump in. If a particular portfolio manager or stock has done well for many years in a row – there is no guarantee that the performance will continue in the future. As noted above, we have seen the US stock market go up for 8 consecutive years. As also noted above, it is impossible to time the market. It is therefore important to stick with your investment plan. If one asset class is getting larger than your target, trim it back and rebalance. This discipline will keep you from chasing performance and falling into other investing mistakes.
Investing mistakes are all too common. The details of your investment strategy must be carefully tailored to your specific situation, your long-term goals, and your time horizon. Your mindset as an investor should remain steadfast to your goals. Failure to accommodate the patience and diligence required to realize your goals will result in the investing mistakes outlined above, and often more. As it is important to get your investments right the first time, consult a trusted wealth manager. They will operate in your best interest and be invaluable in reaching your investing goals and increasing your purchasing power.
2023 3rd Quarter Commentary: “Rising Rates from A to ZIRP”
Recap The third quarter brought back volatility after a first half rebound, with stocks and many bonds giving up some, ...