Investing doesn’t have to be difficult. In fact, history has proven that while there are certainly ups and downs, over a period of years investing in the stock market is one of the best ways to build wealth. But if that’s true, why do many people fail? Here are 5 landmines that can wreck your chance of investment success and what you can do to avoid them.
1. Buying what’s hot![investing]()
The tendency when investing is to look for the fund that is doing great and buy that. Logically, it makes sense. I want my investment to go up so why wouldn’t I buy something that is doing well? The problem is the market tends to be cyclical. By buying the hot fund of the moment, chances are I’m buying at the top of the cycle and there is a greater likelihood the fund may be getting ready to go down in value. Plus I’m also buying the fund when it cost the most.
The answer:
Don’t base investing decisions on this month’s results, or even this year’s results. Look for funds that have long track records of doing well. You want to find funds that have done well over a 10 or 20 year period. That may not be the hot fund of the moment, but it’s a fund that has shown a history of making money. Find a fund that has a good track record and make consistent investments over time.
2. Allowing fear to direct your investments
Investing in the stock market is a little like riding a roller coaster. There are ups and downs. The problem is sometimes the “downs” can get a little scary. When the doom and gloom starts flowing, and you see your investment going down in value, the temptation is to sell and cut your losses. Unfortunately, this is often the worst possible thing you can do.
The answer:
It is important to understand how the market works. Know that it is a roller coaster. If it’s down today, it’ll probably be up next week. Even had you invested at the market’s peak in March of 2000, then watched as we stumbled through not just one, but two of the worst market down turns in recent memory, if you stayed the course and kept your investments, today they would have been up about 3.4%. Not quite what the market has averaged over its history, but still a much better return than you’d have gotten in a traditional savings accounts or CD’s.
3. Not having an appropriate fear of the market
Now wait a minute you say, you just said fear was dangerous and now you are telling me to have fear? Yes, but you need to fear the right things. Some see investing as a way to get rich quick. They are always looking for the hot tip. They trade stocks daily in a search for the big winner. The invest heavily in specific companies that they are guessing will do well.
The answer:
Investing is a great way to make money over a period of many years. It’s a way to lose your shirt if you are looking for get rich quick schemes. Successful investing involves steadily putting a little money away each month, month after month, year after year. As you invest that money you want to spread it around in as many different types of industries, size companies, and locations as possible. That way you stand an excellent chance that if one company is struggling, another will be doing great. This is why mutual funds are such a good alternative because your money is spread out over tens or hundreds of companies.
4. Living too much on auto pilot
While day trading is a recipe for financial disaster, putting your investments on auto pilot and never checking back on them is not a good strategy either. Automating your savings through direct withdrawals from your paycheck is a wonderful way to save, and patience is important. But if you never reevaluate your investments, there are a several landmines that may trip you up.
- Different funds grow at different rates. It is wise to have your money spread evenly over several different types of funds, but even if you start out with a nice distribution, over time some of those funds will do better than others and your balance will get out of whack.
- You may have a fund that has a great track record because the person managing it is really a superstar. But then they retire and someone else takes over. Suddenly, the fund may not be as good. Times change. Circumstances change. The economy changes. That’s why you want funds that have a track record of weathering the storms over many years, but you still need to check periodically to make sure that the fund is still performing like it was.
- Life changes and your investments need to change with them. Risk that is appropriate at age 25 may not be at 55. Marriages and children may change your investment needs.
The answer:
Just as you schedule a yearly physical to make sure your body is still healthy, it’s a good idea to schedule a yearly check-up for your investments. Once a year is probably more than enough. In this checkup you want to make sure your investments are still balanced the way you think they should be, and that your investments still make sense for your current situation.
5. Thinking complicated investments are necessary to succeed
Many think there are secrets to succeeding at investing, and there are lots of sales folks out there who are willing to sell their product (that pays them a high commission) to you. There are plenty of complicated investments products out there that these sales folks promote.
The answer:
Truth is most millionaires have very boring investment portfolios. The real “secret” to investment success isn’t how complicated your investment products are. It’s faithfully investing a little each month over a long period of time, and most importantly never, ever, ever invest in anything that you don’t understand. This might be the most important key of all to investing. This is also why unless you have a very strong background in finance, it is important to have a financial adviser to help in these areas. Just make sure you find one that is willing to teach you and not one who is simply a salesman. A good financial adviser should always be looking out for your best interests and not for what products will yield the highest commissions for them. Sadly there are too many advisers who are more interested in their commission than your education. Successful investing does not have to be and generally is not complicated. Make sure you find a quality adviser who will help you learn what you need to know.
It’s your future
The bottom line is this is your future. Pension programs are becoming a thing of the past. There are questions about the long-term viability of social security. More and more your future will depend on you. But the good news investment success isn’t hard. The steps are simple.
- Get out of debt. It’s hard to have money to invest when it’s heading out the door in payments.
- Find a quality adviser with the heart of a teacher to guide you.
- Put together a plan of simple investments. Mutual funds spread across a wide spectrum of industries and locations are usually the best choices.
- Follow that plan faithfully month by month.
- Check in once a year or so at least just to make sure you are still on track.
Follow these steps over a period of many years and in the long run you will succeed.