From pyramid schemes to your crazy uncle’s latest ‘can’t lose’ project, there are so many ways to lose money. If you don’t want to pay a money manager to lose your money, you might want to follow this DIY advice. Here are 10 sure-fire ways to lose money when investing.
Investing Rules to Lose By
Investing has lots of rules. Here are 10 rules any investor can follow as sure-fire ways to lose money when investing.
1. Go with the herd.
There is safety in numbers or so the saying goes. There is nothing more impressive than the power of a herd of bulls thundering by. You can join them, get out of the way or get run over. Same with investing. If everyone else is buying it, it must be good, right? Wrong. Following the crowd is rarely a good predictor of how good an investment is. Investors tend to do what everyone else is doing and are overly optimistic when the market goes up and overly pessimistic when the market goes down. For instance, in 2008, the largest monthly outflow of U.S. domestic equity funds occurred after the market had fallen over 25% from its peak. And in 2011, the only time net inflows were recorded was before the market slid over 10%.
2. Put all of your bets on one high-flying stock.
Have you ever gone to a casino and played roulette? You can place your bets on individual numbers or choose between black and red. If you bet on a single number and that little ball in the wheel stops on it, you win BIG. Same with stock investing. If only you had invested all your money in Apple 10 years ago, you’d be a millionaire today. I recall speaking with a widow who had very little in the way of stock investments but she still held onto Apple, the one stock her husband had bought near the time it first came out. It was worth a small fortune. In this case, they won the bet but what if, instead, they had invested in Enron, Conseco, CIT, WorldCom, Global Crossing, Washington Mutual, or Lehman Brothers? Recall any of those names? All were high flyers at one point, yet all have since filed for bankruptcy, making them perfect candidates for the downwardly mobile investor.
3. Buy when the market is up.
If the market is on a tear, how can you lose? Everyone knows that once markets go up they keep going up. But just ask the hordes of investors who flocked to stocks in 1999 and early 2000—and then lost their shirts in the ensuing bear market. Physics and gravity also apply to the stock market.
4. Sell when the market is down
The temptation to sell is always highest when market prospects look bleakest. And it’s what many inexperienced investors tend to do, locking in losses and missing out on future recoveries. I recall the story of my Uncle Stevie. He had purchased stock in a new chain of donut shops back in the 1970s. When the price dropped bought below what he had paid, he quickly sold out and locked in his loss. Fast-forward to today and Dunkin’ Brands (DNKN) is a staple in American morning routines sporting a stock price above $50 a share. Lesson: Nothing good comes from panic selling.
5. Stay on the sidelines until markets calm down.
Since markets almost never “calm down,” this is the perfect rationale to never get in. In today’s world with interest rates on savings accounts barely above 0%, that means settling for a miniscule return that may not even keep pace with inflation. In a recent question posed on NerdWallet by a young working investor who had inherited money and her benefactor’s financial advisor, a woman recounted how her advisor felt that stocks were overvalued and poised for a fall … for the past six years! During this time, her advisor has had all of her portfolio investments in cash and bonds waiting for the ‘right time’.
6. Buy on tips from friends.
Who needs professional advice when your new buddy from the gym can give you some great tips? If his stock suggestions are as good as his abs, you can’t go wrong. Or you can remember what Joseph P. Kennedy once said. He knew it was time to get out of the markets in mid-1929 when he started getting stock tips from his shoeshine boy. See tip #1 above.
7. Rely on the pundits for advice.
With all the talking heads out there crowding the airwaves with their recommendations, why not take their advice? After all, they’re on TV and must be good. But which advice should you follow? One commentator may say ‘buy’ while another says ‘sell’. Most pundits have poor track records but are almost always successful at selling their research services and themselves. You’ll save yourself a lot of aggravation by turning off CNBC.
8. Go with your gut.
Fundamental research is something for the pros. For a DIY investor it takes way too much time. It’s so much easier to buy or sell based on what your gut tells you. Afterall, even Buffett and Peter Lynch of Magellan during that fund’s heyday would also say it’s best to invest in what you know and can relate to. Having problems with your laptop or phone lately? Maybe you should sell that HP or Apple stock. When it comes to investing, the gut rules.
9. React frequently to market volatility.
Responding to the market’s daily ups and downs is a surefire way to lock in losses. Even professional traders have a poor track record of guessing the market’s bigger shifts, let alone daily fluctuations.
10. Set it and forget it.
Ignoring your portfolio until you’re ready to cash it in gives it the perfect opportunity to go completely out of balance, with past winners dominating. It also makes for a major misalignment of original investing goals and shifting life-stage priorities. Invariably when I do a portfolio review for a client near retirement, I’ll note that their investments are no where near the ‘Risk Number’ they have based on their risk tolerance answers or their goals and timeframe.
Avoid Investing Mistakes with One Tip
Looking for one sure-fire way to not lose money when investing? Have a plan. It will help you stay on track through the inveitable ups and downs of the market. And with a plan you’re less likely to react emotionally during turbulent times. While investing may not be ‘rocket science,’ you can still benefit from the help of an experienced guide whether or not you’re a DIY investor.
To start your own plan, call Steve Stanganelli at Clear View Wealth Advisors.