Investing success is generally not about finding the next big thing. It is also not about active trading or getting a great stock tip from your Uncle Warren. Investing success is all about consistency and avoiding behaviors which are detrimental to your long-term gains. Major investment research firm Dalbar, Inc. published a paper where they compare long-term returns of average mutual fund investors with returns of the S&P 500. In every year since 1992, the average investor has significantly underperformed the index. So, what kinds of behavior are important to investment success?
Confusing speculation with investing – Buying a hot stock and selling it when it doubles is not investing. It’s speculation. You might make money sometimes, but if you want to gain wealth over the long run, invest in a diversified portfolio based on your goals and risk tolerance. Speculation is just slightly better than gambling.
Trying to time the market – It’s impossible to time the stock market. It is inevitable that if you try to sell because you expect the market to go down, it decides to go up and you miss gains. If you buy and sell based on market prices or short-term news, you will mess up. Any market timing system may work in the short term, but usually fails in the long run.
Not being diversified – Diversification reduces certain types of risk in your portfolio. It is extremely important in long-term investing success. You need to diversify geographically, by asset class, by sectors, and by investment. Diversification does not reduce all risk and investments can still go down in value.
Pay attention to your timeframe – If you are 40 years old, you have 27 years until your official retirement age. But if your child is 15 and you are saving for college, you will need that money in 3 to 7 years. Clearly you can and should take more risk with your retirement money, but be very careful with the short timeframe for the college fund.
Confusing skill and luck – Everyone makes money in the stock market sometimes. It’s easy to congratulate yourself for your outstanding skill when you make money and beat yourself up for your mistakes when you lose. S&P Dow Jones Indices 2018 annual report shows that only 31% of fund managers beat the market in 2018. Over the past 15 years only 8% beat the market. Most professionals don’t have the skills to beat the indices, so why would you?
Buying magic products – Many so-called advisors sell products. These products might promise lowering taxes or limiting downside risk. But all these products come with tradeoffs that usually involve limiting access to your money or high fees. Insurance products can sometimes change their terms and you have little recourse. Make sure you understand all the costs and limitations in any investment product you buy.Your investment advisor should be counselling you regarding your behaviors which may hurt long-term investing success.
A professional should understand that everyone is susceptible to these bad investing behaviors including themselves. Always hire a fiduciary advisor who will put your interests first.
David J. Haas CFP® is President and Founder of Cereus Financial Advisors, LLC, a registered investment advisor in Franklin Lakes working with clients in NY and NJ. Cereus Financial Advisors helps clients with independent fiduciary financial advice, wealth management, and retirement planning.
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