I had the pleasure of sitting down with Charlie Langton at the Fox 2 Detroit studios last week to discuss the common investment misconceptions and mistakes that I frequently see. Even though the list is more comprehensive than this, here are the main key points we discussed during our interview.
Investing Without an Objective
Would you ever start a trip without having a clear idea of where you are headed? Investing without a clear objective is a lot like taking a road trip without a map or a destination in mind. Without a specific goal in mind that you wish to reach, you will be more likely to react to short-term market fluctuations.
These short-term fluctuations and the shifts that you will be tempted to make can do you more harm than good. Instead, you should aim to have both a timeframe and a dollar amount in mind. For example, you may wish to have a certain amount of money set aside by the time you hit age 65. Placing specifics on your financial goals can help you to determine the likelihood of attaining your goal and show you how to adjust your contribution rate accordingly.
Failing to Properly Assess Risk
Failing to properly assess risk can be a double-edged sword. Some people jump into the market with both feet and end up taking on more risk than they should. These overly-aggressive investors may harm themselves in the long run. They may take more risk than they need to reach their goals or even risk that they cannot stomach.
Unfortunately, being on the other side of the spectrum and being too conservative with your portfolio is also a mistake that some people fall into, it’s easy to place too much emphasis on short term volatility in the markets instead of focusing on the probability of reaching long term goal over time.
Trying to Time the Markets
Even the professionals have a hard time pinning down the fluctuations of the market. If an expert money manager cannot predict the market, it is extremely unlikely that the average person could beat the system. In fact, the best days usually happen within the downturn.
If you still aren’t convinced, it’s time to take a closer look at the numbers to see what you might miss out on. Individuals who stayed fully invested between 2003 and 2018 would have seen annual returns of approximately eight percent. In other words, you would have tripled your money during that time frame.
If you miss only the ten best days, your annual returns would have been less than three percent a year (less than a fifty percent total gain in that same time frame). Missing the thirty best days means that you would have had negative returns. Trying to time the market isn’t likely to work out in your favor, so it is wise to stay fully invested and keep your long-term objectives in mind.
These are just a few of the most common misconceptions and mistakes I see play out on a regular basis. For a more comprehensive review, feel free to download or e-book for free using this link