You know the one. The one that had such great promise only to plummet like a runaway elevator in a horror flick!
“Why did I buy this?”
“Was my researched flawed in some way?”
“Why didn’t I sell sooner!”
Just a few questions you probably remember running through your head as that elevator picked up speed.
A recent 2012 Dalbar stucy showed that over a 10 year period, the average investor had returns of 2.38% while the S&P 500 clocked in a 7.1%. So what can we conclude from this huge difference?
It’s about investor behavior and beliefs not the markets.
First, investors fail because they believe in their ability to pick the right stocks and time the market. Even the veterans of the financial services industry of 30 years or more, struggle in picking the right stocks. Plus, I wrote an article about how market timing is a fool’s game. Both are difficult at best. Even with great tools, up to date research, emotion and greed will play a significant factor. Logic will go right out the window, when the stock starts to drop.
Second, investors fail because they allow financial headlines to mess with their heads. To good to be true deals and guarantees of ridiculous returns are everywhere. That doesn’t include just the sheer volume of conflicting news and information available. It’s hard to disseminate what is really important. In addition, everybody wants to brag about that investment they found that made them a killing.
Third, investors fail because many just don’t possess the knowledge and experience to make consistently good decisions. I’m not saying investors are not smart. Rather than do the homework required about risk tolerance, asset allocation, time horizon and goal setting, some investors will just buy the next investment d’jour that an unscrupulous cold caller offers.
So what can investors do to avoid these common failures?
1. Develop a logic based buy and sell criteria. Don’t buy investments based on sex appeal or a slick presentation. Make sure it fits your overall financial goals, asset allocation and your portfolio. Stick with the basics.
2. Figure out why you make bad decisions. Was it the excitement of the big payoff? Was it lack of research? Step back and really analyze why you continue to make some poor investments. Do your homework.
3. If you don’t possess the time or the expertise to make good investments consistently, then hire an expert. Find a financial advisor that adheres to a strict investment process. Also, look for an advisor that is fee only or fee-based. That way their motivation will not be for getting a commission for every investment sold.
It’s your money, so take the time to do some research on your own about the investments you are considering. It takes time and discipline to be a successful investor.
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