Frequently in this blog I've commented on the premise that success in investing balances on two focal points; [a] controlling what you can control and [b] having a definitive process and system behind your investment decision making.  

Here's 3 Common Investment Mistakes to avoid and I think that you'll see that each of them falls under one of those two pivotal issues. 

Not Saving Enough

Few if any of us are going to reach our goals based on earnings power and the ability of our existing investments to carry the day.  Without regular and recurring additions, our investments may well still grow, but doubtful is the fact that they'll grow to the extent that we can discount the value of adding to our portfolios along the way.  True, we will get periods of higher returns and it will appear that savings isn't quite as important. After all, when you get a market like 2013 where the S&P 500 was up 27%, that can make adding more money seem much less important. But, it's not. Saving more each year is still the best way to help ensure that you make consistent progress towards accumulating the capital you need to reach your goals. 

Replacing A Commitment To The Market With The Market

It's funny and a bit counter-intuitive but most people want the markets to go up an inordinately high amount as frequently as possible so that not only will their wealth increase, but at the same time, they'll be let off the hook for saving for their future goals. This is never more prevalent than it is when market returns have been better than average as they were last year. But last year's market isn't this years market and while we might hope and wish, we can't avoid the fact that markets are a collaboration of factors, all working together. As a general rule though, in an environment such as we're in now, with historically low yields, the likelihood that we'll backup outstanding year to outstanding year is pretty darn slim. So keep in mind that you and "the market" are equal partners in this dance to achieve long-term financial success and you "both" have to do your part. But, your partnership with the market isn't one based on tradeoffs. This is a lot like strength training. Whether you're going to the gym or working out from home, the reality is that you'll likely see marked physical results only when you're pretty far down the road and look back at where you started.  The impact of your work is so subtle that it's virtually impossible to see it if you check the mirror every morning when you get up. The key here is consistency, sticking to the plan whether you see results or not. 

Avoid Riding The Winners and Shunning The Losers

We all like things that go up.  I've seldom had a conversation with a Client who has noted that they're worried about their investment holding that's going through the roof.  

Similarly, I've had many conversations with Clients who would prefer not to own that thing in the portfolio that's going down. 

Rebalancing your portfolio, trimming your winners in good times to add to your losers is a hard pill for most investors to swallow and yet, the adage, "buy low and sell high" is one even the most uneducated investor can usually recite.  But if that's the case then why don't we do it?

First, we're suffering from the misconception that what is going up will keep going up forever, even though we know that that's just not plausible.  And, we think that what's going down will keep going down forever as well.  Equally as implausible. Perhaps the difficultly lies in part with the adage itself.  It's entirely possible we think that the adage says "buy lowest and sell highest?"  I'm sure that's part of it.  And, for the record, this too is equally implausible. 

Whenever I have this conversation with investors, I liken it to the reason most people have such a hard time hitting a golf ball.  We all want to hit a golf ball and watch it sore into the air, tracking it with anticipation ala Tiger Woods. And we might get closer to that reality too, if we simply forgot about a few factors.  First, where we want the ball to go is UP and the slant of the club face is UP so to get it UP we must then lift the ball into the air right?  Wrong.  Precisely wrong in fact. 

Probably the only thing more counter-intuitive than trimming your winners and adding to your losers is the notion that to hit a golf ball UP you have to hit down on it. 

Counter intuitive thinking means that on average, you're investing just the way you think that you'd shouldn't be.  It's hard to do I know, but whether it's adding to your positions when markets decline or cutting back on your winners, the long-term victory goes to process. 

So in summary; 

  • Save
  • Be patient with the markets
  • Think in reverse

If you can do these things, you can make significant progress towards your goals by building wealth consistently over time.