Why do so many do-it-yourself investors perform far worse than they should? How do you make sure and avoid some of the potholes that most amateurs seem to step in?
In theory, people managing their own funds should do well. Today’s investor has access to more tools, more research, and more information than ever before. You can easily view data in near-real time, putting the average person on par with professional brokers and large brokerage businesses on Wall Street. It’s easy to track company performance, get up-to-date and late breaking information just by opening an app on your phone. What a world!
But, with all this information available, you’ll need to filter out truisms, half-truths and outdated ideas. Managing your own money isn’t tough, but it’s easy to fall into traps.
Let’ s walk through some top myths today’s investors need to realize aren’t true anymore.
First, a diamond may mean forever, but buy and hold isn’t. You shouldn’t just buy a stock and close your eyes. Occasionally, good companies have badly performing stocks. Instead of “buy and hold” investors should “buy and pay attention.” You should carefully select your positions based on the information at hand, but be sure to have a well-thought out exit plan before you buy the stock.
Second, performance isn’t the only thing that matters….and I’m not just saying that because I’m a guy. Historical performance is worth noting, but it’s not, as they say, indicative of future performance. We do believe, however, that performance does persist – there is investment momentum. What matters more than past performance? Simply put, volatility, tax considerations and overall asset allocation should be equally considered. It’s paramount to create a portfolio that compliments your long-term investing goals. Remember that the ones that shoot up fast are also the ones that crash quickly. Volatility is a two way street.
Listen to ways your investments could be more successful on our podcast: 2 Guys & Your Money Episode 15: Top 5 Ways to Improve Your Investment Returns
Third, charts don’t only make sense for professionals. Some people believe only “technical traders” use charts or that they’re somehow outdated relics from a bygone era. Not true. Charts can tell investors a great deal about what’s going on in the markets and with any particular holding. Charts aren’t crystal balls – but they can help you manage risk. How much volatility has a position had in the past? How does today’s price compare with past prices? When does the position pay dividends? How has this position grown relative to its peers? All of these are easily answered by reviewing a few charts.
Finally, don’t try to always buy at the bottom. This one’s really dangerous. How do you know it’s the bottom? Investors are egotistical beasts; we think that because it looks like the stock/bond/real estate/whatever is going to turn around, our few dollars are boing to be perfectly placed. We’ve seen investors buy stocks at $10 that once were $100, only to find out that they were not even close to the bottom. Remember two things: 1) you’re nobody in the market, and your brain is too small to call the bottom of the market (sorry if that offends you); and 2) investment prices fall for a reason. If a position is “on sale,” it’s important to know why it’s fell before you make a bet that it will rise again from the ashes. The person who buys a stock that’s near its yearly low is betting their purchase is going to be the reason it turns around. Unless you’re Warren Buffet, I wouldn’t be too sure.
The biggest rule when it comes to investing is not to try to ”win big” but rather “lose small.” Manage and know your risk before establishing a position and you’ll go a long way toward becoming a more successful investor.