It's an investing cliché that the general public always buys high and sells low and has an uncanny knack for getting into and out of the stock market at exactly the wrong time.
And, in fact, the cliché has been proven over and over again by solid research.
So, why does "the little guy," always turn out to be "the dumb money" and what can the little guy do to invest and make money like "the smart money" does? In this article we'll examine the 4 most common mistakes investors make and how to avoid them.
Big Investment Mistake #1: Buy and Hold This is a Wall Street favorite that's touted in almost every financial periodical and book about investing.
Buy for the long term and hold your investment, and over time, you'll make money.
But the sad fact is that this just isn't true and this one piece of advice has cost investors trillions of dollars in lost profits.
From 1998 to 20005, buy and hold investors made less than 1% per year on a compounded basis, mostly due to the bear market of 2000.
Beyond that, it took a full seven years for the S&P to regain its highs set in March, 2000.
That means that Buy and Hold investors lost seven years of their investment lives! And consider this.
The average recession in the United States slams major U.
S.
equity markets for median losses of more than 40%, and since the end of World War II, we have gone through 11 recessions.
That means that once every six years you will be faced with an economic environment that can wipe out 40% of your net worth.
But if you can develop your own active trading plan and test it and use it diligently, or if you just follow one of the proven systems available, you will join the ranks of the professionals and avoid the Buy and Hold Trap forever.
Big Investment Mistake #2: Investing in just stocks, bonds and cash Traditional investing wisdom says that you should have a balanced portfolio of stocks and bonds and cash with a declining amount in equities as you age.
But the sad fact is that the traditional 60/40% mix of stocks and bonds has more than a 98% correlation with the S&P 500, and so even though you think you're diversified, you're not.
The best way to avoid the stock/bond/cash mistake is to invest outside of these three assets that oftentimes provide no real diversification at all.
Markets like Emerging Market Stocks, REITS, Emerging Market Bonds, Commodities and High Yield Bonds all move independently of the stock market and are uncorrelated to its returns and have returned more than double the stock market over the last 10 years.
Every investor needs to consider how to add a significant portion of these uncorrelated assets to his portfolio, and in today's markets, a wide variety of Exchange Traded Funds allow us to do just that in a simple, cost effective way.
Big Investment Mistake #3: Chasing the latest "hot" manager, mutual fund or investment Chasing the latest "hot" investment is a certain recipe for disaster.
Investing in a mutual fund or stock when it's hot will almost always lead you to getting in right at the top and just before it begins a long slide down into the losing column.
A classic example of this phenomenon is the legend that just before the Crash of 1929, Joseph Kennedy sold all of his stocks because his shoeshine boy was giving him stock tips and so he knew it was time to sell.
And this still holds true today.
When everyone you know is buying a stock or getting in the market, it's definitely time to get out.
Big Investment Mistake #4: Following the "advice" offered by the talking heads on television.
A huge investing mistake so many investors make is listening to and investing according to the talking heads on television.
These programs should come with a big disclaimer: For Entertainment Purposes Only; because that is just what they are.
They're fun to watch and provide fast moving commentary, but if you're investing according to what you hear on television, you are doomed to failure.
In summary, the 4 Big Investment Mistakes all add up to unnecessary risk, unnecessary loss and unnecessary pain for the average investor, and all of them are easily avoidable with a consistent, disciplined plan that takes advantage of up markets while reducing the negative effects of down markets.