Are You Still Making These Mistakes?
Key Takeaways
How do you improve your investment performance? Well, don’t do these three things below;
Trying to Time the Market
Missing out on just one day of good performance in the market can greatly affect your long-term returns.
Focusing on the Headlines
On average, companies that are the current talk of the town and trendy have subsequently failed to outperform in the years after becoming popular.
Chasing Past Performance
Popular funds that have done well experience a huge influx of flows from investors trying to jump on the bandwagon, only to perform very poorly in the years ahead.
Call it humility, call it honesty with yourself, but failing to admit to investment mistakes means failing investing.
— Joel Tillinghast
Many people start out managing their own investments. There is a glut of information that one can tap on — whether via the investing section in the library or through a simple Google search. There are also those well meaning family members and friends who will tell you all about the money they made from a hot stock, but tell nothing of the losses they have suffered elsewhere (because it’s embarrassing after all).
However, there is only so much you can DIY — as your earnings and assets grow, your financial needs and challenges become more complex. Throw having children into the mix, who may be living in a different country, overseas assets and worldwide taxes, foreign withholding taxes, moving from accumulation to retirement, and everything becomes an overwhelming headache to manage. Continuing to go it alone could prove costly, especially in terms of investing mishaps and snafus.
Whether or not you are still doing it yourself, in the process of seeking help, or already have a trusted financial adviser, consider these three common mistakes that can reduce returns and increase anxiety.
1. Trying to Time the Market
It is natural to be tempted to cash out of the stock market to avoid a predicted downturn. Essentially the holy grail of investing is to capture all of the returns, but none of the losses. Imagine being able to get out of that investment just as it was about to tip over!
But accurately forecasting the market’s direction to time exactly when to buy and sell is quite simply, a guessing game. Whilst you may be able to get it right sometimes, it is highly likely (and statistically probable) that you will get it wrong. After all, when markets are volatile — this means that stocks are moving down quickly but also up quickly. So getting out of your investments when it is moving sharply down will mean you also miss it when it moves sharply upwards. And missing any period of strong market performance can drastically affect your lifetime wealth as the diagram below shows. A day can literally make a huge difference. Several days…. well, you get the picture.
2. Focusing on the Headlines
Investors may become enamoured with popular stocks based on recent performance or media attention — and concentrate (overly so) their portfolio holdings in these companies. One example is the rise of the large US technology companies known as the Magnificent 7 (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla). Another recent hot area was the Japanese stock market.
But the chart below shows that many fast-growing stocks stopped outperforming after becoming one of the 10 largest stocks in the US. On average, companies that outperformed the market on the way up have failed to outperform in the years after making the Top 10 list.
If you want a smoother ride with less headaches, own as many stocks as you can through asset class funds. Diversifying across industries and global markets can help reduce overall risk and position investors to potentially capture the returns of future top-performing companies.
3. Chasing Past Performance
You might be inclined to select investments based on past returns, expecting top-ranked funds to continue delivering that record best performance. But can they maintain that outperformance? Research shows that most funds ranked in the top 25% didn’t remain in the top 25% in the next five years (based on five-year returns). In fact, only about one in five equity funds stayed in the top-performing group, and only about a third of fixed income funds did. The lesson? A fund’s past performance offers limited insight into its future returns.
A good recent example was the ARK fund run by Cathie Wood — a fund manager who was the toast of the town and graced many a magazine cover in 2021 after achieving stunning returns of over +250% as a result of her “prescient” stock picks.
Unfortunately, that performance has not persisted. After investors had piled into the fund due to its excellent historical performance, its value had fallen by more than half — with the fund currently sitting around -65% from its 2021 peak.
Working with an Advisor Can Help
Avoiding these mistakes can improve the odds of reaching your long-term investment goals. But, as a do-it-yourself investor, you’ll have to manage the challenge alone. A qualified financial advisor can offer deeper expertise and insights that lead to better financial habits.
But the potential benefits go beyond just helping you avoid a bad decision. An advisor can design a diversified, research-backed investment strategy based on your long-term goals and comfort level with risk. Equally important, you can look to a seasoned professional for guidance through different markets. By walking with you on the journey, an advisor can encourage the discipline essential to building wealth over time.
