The Four Most Common Investing Blunders
DALBAR is a financial research firm from the Boston area that has been researching investor behavior for the past 30 years. Its most recent 20th annual report based on 30 years of data had some very scary things to say about the small investor.
Thirty years of data indicate that the small investor earns about half of the long-term returns of the major indexes – Dow Jones and S&P 500.
The reasons are pretty obvious, too.
The biggest is the small investor looks at his portfolio too often. Constantly checking stock prices will increase trading frequency.
That’s the second most common reason for earning less than the indexes. Frequent trading never has and never will increase your return. It will reduce your returns.
Next, they focus too much on positions that are down at the time.
No matter what stocks you hold, some will be down at one time or another. That does not mean you have to sell at a loss.
When I was working as a broker, I made my more likely to panic clients write down the reasons we bought a stock and made them pull the list out to read every time they called to ask if we should sell because it was down a little, or even a lot.
I get this all the time from my newer bond subscribers. The toughest thing to learn about investing is that time fixes just about everything. Leave it alone.
And that brings up the last reason most make less than the market offers: investors are unskilled and inexperienced.
Most investors are totally ignorant of even the minimum understanding required to make money. I have thought for years a person should be required to take a standardized test to demonstrate minimum competency before they are allowed to invest their own money. The mistakes you see as a professional in this business are horrifying.
The solution: look at your stocks, at most, once a week, have a written plan and write down the reasons you own each position, have a time horizon of at least three to five years – longer is better – and don’t be afraid to ask to help. The Pillar One Advisors The Oxford Club lists for its Members is a great place to start.