As people look at their investment portfolios and compare their value to what it was worth at the end of 2007, there is probably a wide range of emotions. Those who sold early in the bear market and held cash have to feel good about that choice, but some are kicking themselves for still being in cash and missing the last 5 month rally. Those who held on to their stocks and rode them lower and lower certainly feel frustration as they wonder why they didn’t sell at the first sign of trouble.
It’s almost impossible to predict how most stocks will perform in the future, but there are several mistakes that many investors make that can hurt the performance of their portfolio. Here are 5 mistakes to avoid as an investor:
– Don’t try to time the market: There are many traders out there who will gladly tell you tales of the perfect buy and sell calls that they have made on stocks. They’ll be less likely to tell you how many times that have guessed and been wrong. It’s impossible to know which direction the market is going from one moment to the next, and those who try usually get burned often enough to think better of it in the future.
– Don’t Rely On Past Performance To Predict Future Results: Just because an investment has averaged a 10% return over the past 10 years, it’s not guaranteed to generate a 10% return in future years. There are many factors that go into investment performance. Buy investments based on factors that will drive performance in the future, not based on what they have done in the past.
– Don’t Let Your Emotions Dictate Investment Decisions: Warren Buffet, one of the top investment minds in history, is famous for saying that he buys when people are scared and sells when people are greedy. Many investors sold as the market was bottoming out because the losses were just becoming too much to bear, but selling at that point made those losses that had been on paper a reality. Now that the market is headed in the right direction again, the same investors that were selling 6 months ago will feel better buying again, when the market is high. No one makes money by buying high and selling low.
– Don’t Take Risks That You Can’t Afford To Take: Although we can’t always see bear markets coming, we know that periodically stocks will have a bad year, some worse than others. Whenever you buy stocks, you need to realize that they could lose value very easily. If you’re using next month’s mortgage payment to buy stocks, there’s a risk that you’ll come up short on next month’s payment. Invest for the long term with dollars that are reserved for your long term goals.
– Don’t Invest Without A Plan: Whenever you buy as an investor, you should have a goal for that investment. You should also have a plan that you can rely on if things go in the wrong direction. Have a plan for when you will sell in a good market or in a bad market and stick to that plan.