Investing: Mistakes to Avoid
What are the most common investing mistakes?
You read all this stuff about steady investing and nod your head. But in a bear market, you may forget your good intentions. Our attitudes and emotions tend to undermine the strategy we set. Mastering these emotions is just as important as mastering an investment discipline. Here are five of the most common mental errors:
1. Fear of loss. We're more alarmed by a minor loss than we're cheered by a major gain. To prevent these temporary losses, we panic and sell or invest more conservatively than we should. Antidote: become a rebalancer, to check your tendency to cut and run. To encourage growth investing, study the market's past performance. See how little you get from conservative income investments after taxes and inflation.
2. Short-term focus. If the mutual fund in your 401(k) loses money over 6 or 12 months, you might sell it and shift to something "safer." Conversely, you might leap into a fund that currently tops the performance list. Antidote: Keep checking Morningstar, the publisher of mutual-fund data, to see which funds are currently ahead. A fund that's hot for six months often cools in the next six months and vice versa. Once you've chosen a fund for good reasons, stick with it for 3 or 4 years unless the fund's management and objectives or your circumstances change.
3. Fear of making the wrong decision. With so many investments to choose from, some investors freeze. They leave their money in the bank or the fixed income account in their retirement plan. They leave it in mutual funds that they know are unsuitable because they're afraid to change. They might hand it over to someone to manage without knowing much about the person they've handed. Keeping your money in its usual place is a decision too — and often the wrongest one.
4. Fear of regret, also known as hindsight bias. You're afraid that you'll hate yourself in the morning. You should have bought that East Asian fund that rose 25 percent instead of the balanced fund that did only 10 percent. You should have switched to a money fund this year because stocks went down. Self-recrimination produces one of two effects: you do nothing, so you won't have to kick yourself; or you desperately try to catch up by jumping into that East Asian fund (too late). Antidote: proper asset allocation and rebalancing.
5. Reluctance to take losses. This is the reverse side of panic selling. We refuse to sell because that seals our doom. We can't help believing a stock is worth the price we paid, so we hang on to losers, waiting for them to "come back." As long as we wait, we have hope. Selling buries hope, which makes us miserable. Antidote: take losses in December, when you can think of them as tax deductions. Or think of selling as a "swap" for another investment you like better. Or sell just some of the stock today and sell more later if it keeps doing poorly.
Excerpted from Making the Most of Your Money Now by Jane Bryant Quinn
Copyright 1991, 1997, 2009, by Berrybrook Publishing, Inc. Reprinted by permission of Simon & Schuster, Inc
Buy the Book