How Not to Invest

Every once in a while we hear investment suggestions that make us uneasy. It’s not that the suggestions are necessarily wrong or bad, more often than not they are based wholly in common sense. The problem is that the rules of common sense rarely ever apply to good investing.

 

AMP’s Chief Economist, Shane Oliver, recently wrote a piece discussing some of the bad habits we have as investors. We were struck by many of his points and wanted to share.

 

The deadly sins of investing are:

 

  1. Investing with the crowd

Often times, we feel safest when going with the flow and investing in the same assets as our friends and neighbours. This is a BIG No-No in investing. As Oliver notes, “when everyone [thinks the market will only improve] and has bought into an asset with general euphoria about it, there is no one left to buy in the face of more positive supporting news but lots of people who can sell if the news turns sour.”  Investing as such would mean buying something when it is already popular and expensive, therefore you would likely not be able to make much money from it, and then there is the risk of losing a lot of money when bad news hits and every one else sells the asset at the same time you do.

 

  1. Using current returns as a guide for the future

Similarly to investing with a crowd, by investing based off of current returns and assuming the trend will continue we put ourselves in a bad position. This is because if we’re only buying assets that are already performing well, we’re buying when assets close to when they are at their most expensive and potentially selling when they are cheapest – both of which are certainly not good for the pocket book.

 

  1. Believing strong growth is good for stocks & vice versa

The understanding that strong growth is good for stocks is certainly true over the long-term, but you can’t rely on this principle for investing. The issue is that markets are forward looking and even before data like unemployment rates are released, markets will have already priced the data in. So if you’re looking to invest on strong data, you are very unlikely you will make money off of it – everyone will already be there. Even if you’re quick to act, you’re probably already too late.

 

  1. Believing experts can tell you exactly where the market is going

As good and as well trained as they are, experts only know so much about which way the markets are going at any given time. Forecasts of investments and economic indicators are always helpful to give you an idea, but they need to be used with caution – no one will ever know what to expect with 100% certainty.

 

  1. Allowing a strongly held view get in the way of good investing

Don’t let blind faith get in the way. We, as humans, are a complicated bunch and we all have strong opinions on what is happening in the world. The problem with not looking at the bigger picture and instead holding solely onto our beliefs is that many times events we might believe to be imminent don’t ever actually happen and vice versa. This could very easily get in the way of allowing our portfolios to grow.

 

  1. Looking at your investments too often

This may seem counterintuitive, however the more often you look at investments and the more you are exposed to the news media, the more likely you are to adopt a level of risk that is not appropriate for you. In fact a 1997 study revealed that investors “with the most data [about how their investment is performing] did the worst in terms of money earned,” for just that reason. By looking at our investments too often, we get in our own way.

 

  1. Making investing too complicated

The more time you spend overthinking your portfolio and debating on this and that stock or this and that fund manager, the less time you spend focusing on what matters: the key drivers of your portfolio’s risk and your asset allocations. This could severely undermine the quality of your portfolio.

 

  1. Being too aggressive or too conservative than appropriate for you

Not investing according to the risk level appropriate for you can make it difficult to fund your retirement. Either you don’t have enough growth assets in your portfolio to actually build your wealth, or you have too many growth assets and the higher volatility could mean that if you’re retiring at a low point in the market you won’t have enough money in your portfolio. Make sure you’re being just as aggressive or conservative as you need to be.

 

  1. Trying to time the market

Not only is trying to time the market (selling before falls in the market and buying before gains) extremely difficult, but it is an easy way to destroy wealth. If you’re really good at timing the market you might miss some bad days, but more than likely you’ll miss most of the good market days. Missing good days tends to be much more detrimental to your portfolio’s value than skipping the bad. By maintaining a buy-and-hold strategy, where you buy something and don’t sell it for a long period of time, you’ll be able to take advantage of the market’s little wins. Overall, studies show that despite the bad days, buy-and-hold investors do much better over the long term than those trying to time the market.

 

For more information and Shane Oliver’s article click this link.

Logan, Jason, and Carl Richards. “Sea of Uncertainty.” The New York Times. The New York Times, 12 Nov. 2016. Web. 16 Nov. 2016. <http://www.nytimes.com/interactive/2016/11/13/your-money/wealth-cartoon.html?src=me>.
Oliver, Shane. (2016, November 24). The 9 (bad) habits of highly ineffective investors – the common mistakes investors make. Retrieved December 7, 2016, from http://www.ampcapital.com.au/article-detail?alias=%2Folivers-insights%2Fnovember-2016%2F9-bad-habits

 

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