Is learning to invest anything like learning to swim?
A few years ago, I decided to compete in an Ironman triathlon. There was one small problem though – I didn’t know how to swim. To be fair, I knew how to stay afloat and could doggy paddle from one side of the pool to the other, but I was nowhere close to swimming the requisite 2.4 miles.
Knowing that I needed to solve the problem, I did what anyone would do… I turned to the Internet. I read up on everything I could about how to swim. I watched videos and studied techniques for hours. Soon enough, I was ready to jump in the pool and swim those first 25 yards.
Was I an expert? Um…absolutely not. Could I instantly compete with Michael Phelps simply because I read something on the Internet? Doubtful.
The Internet provided me with an introduction, but it certainly didn’t make me an expert.
Learning to invest is oddly similar to learning how to swim. It’s easy to “get your feet wet” by reading various articles and strategies on the Internet, but, it’s impossible to become an investment guru after reading a handful of articles on CNNFN.com.
I see a lot of investors make this mistake and then try to compete with seasoned investors in the market. Here is a list of 10 common mistakes that I see investors make.
Mistake # 1 – Assuming you are diversified because you own a mutual fund
Owning a mutual fund doesn’t automatically make you diversified. A mutual fund may only have a few positions or be concentrated on a particular sector. When purchasing a mutual fund, you need to know precisely what’s “under the hood”.
Mistake # 2 – Assuming you are diversified because you own more than one mutual fund
If I buy one carton of Haagen-Dazs and one carton of Ben & Jerry’s chocolate ice cream, should I expect significantly different flavors between the two? Of course not, they are both chocolate. The same goes for investing. You may have two or more mutual funds in your account, but are you sure that you have different flavors?
Mistake # 3 – Assuming you are “good” because you own Vanguard, Fidelity, or enter your favorite company “here.”
“N” and I were shopping a few months back for a car and we bought a Ford. What does that tell you about the car? Wait for it…..Nothing! Is it 2-door or 4-door? An SUV, a truck, or a compact? What color is it? How’s the gas mileage? What type of engine does it have? I think you get the point. When you buy Vanguard or Fidelity, you are buying a brand. It doesn’t tell you anything about the underlying investment.
Mistake #4: Investing on past performance
Did you know that nearly every investment brochure referencing performance has these words on it – “Past performance is not indicative of future results.” What does this mean? They are literally telling you that the performance information you see has no connection to what happens in the future. NONE. Think of it like a winning lottery ticket – you don’t see people swarming the convenience store to request the winning numbers from the night before, right?
Mistake#5: Treating investing like a game
Crazy right? Surprisingly, this happens all the time. I have heard countless investors actually use the phrase, “I am going to play with this money.” Play with it? Really? You do know that the money you are “playing with” is real, right? Treating investing like a game can result in a loss of real money, not Monopoly money.
Mistake #6: Trying to time the market
Timing the market goes hand-in-hand with treating investing like a game. Some investors believe that they can time the market hourly, daily, weekly, monthly, or even on a yearly basis. This means they try to sell right before the market goes down, and buy right before it goes up. It may work in the short term, but I have only ever seen this result in driving up fees…not rates of return.
Mistake #7: Picking investments based on someone else’s opinion
Overthe years, I’ve seen many investors pick their investments because a friend, family member, or co-worker told them to. Investing is not a one-size-fits-all model. Does that person have the same risk tolerance, financial situation, and time horizon as you? Just because an investment is right for them doesn’t mean that it will work for you.
Mistake #8: Expecting quick returns
Good things in life take time! Investing is no different. If you are expecting to turn your hard-earned cash into millions in the short term, then you are better off playing the lottery (and we know that’s not a good idea either).
Mistake #9: Getting greedy
The US stock market has been on quite a run over the past few years. Hopefully, you have invested wisely and reaped the benefits. That being said, remember that what goes up may come down. Be careful not to create unrealistic expectations and invest under the belief that you will always make money.
Mistake #10 – Over-exaggerating your own investment performance
We all have “that friend” who tells us over and over about the one time he won $500 at the casino. Do you know what he didn’t tell you? The 10 other times that he went to the casino and lost! The same thing happens with investing. Investors love to share their small victories, conveniently leaving out the many other times they failed.
Diversification does not guarantee a profit or protect against a loss.