There's an old expression: a fool and his money are soon parted. It makes one wonder, though, how a fool and his money got together in the first place.
You've heard of the 'smart money.' Well, there's also a syndrome that I like to call the 'dumb money,' and I've put together what I believe are the most common examples of investor dimwittedness. Learn what they are -- and make sure you avoid them.
1.) Jumping into bull markets and bailing out during downturns.
There's a natural allure to 'up' markets. But the intoxicating effects of a bull market are not conducive to rational investing. Bull markets get the animal spirits racing, clouding investors' better judgment. By the same token, bear markets can be depressing, convincing investors to avoid bargains or sell investments at a loss.
The herd mentality is hard to resist; most investors march like lemmings right off the proverbial cliff. The easiest way to come up with investing strategies is to listen to the 'group think' of friends, family, colleagues, talking heads, and chat room know-it-alls. But the easy way is generally the road to ruin.
Remember: Everybody does well in a bull market. But don't mistake a bull market for brains. Be a contrarian investor. If the herd points in one direction, move in the other.
And the LAST thing you want to do is bail out of a down market, thereby locking in your losses. You're usually better off waiting out a downturn, instead of panicking.
2.) Setting long-term goals, but settling for short-term profits.
Investors sometimes capitulate on their long-term strategy by saying, 'A bird in the hand is worth two in the bush.' But don't forget the two in the bush will often experience the magic of compounding while the one in the hand will only make a single small, and ultimately unsatisfying, meal.
Methodical investment approaches produce long-term wealth. Don't confuse that with the random occurrences that generate short-term wealth, similar to playing in a casino.
3.) Living in the past.
The investment adage -- past returns are no guarantee of future performance -- is all too often forgotten. Don't dwell on past glories or defeats; remain forward-looking.
4.) Putting investments on automatic pilot for too long.
Don't put your investments on automatic pilot. Review your investments at least twice a year so you're not blindsided by constantly changing events.
Like an entrepreneur forging a business or an athlete preparing for competition, it takes dedication, money, time, and attention to be successful.
5.) Micro-managing portfolios instead of keeping an eye on the big picture.
Focus on trends that will play out over the long-term. That means years or even decades. Monitor economic and financial trends instead of getting caught up in day-to-day market movements.
Big single-day moves in the market, up or down, are certainly nerve-rattling. But don't lose perspective. Day-to-day movements are noise, not information. Don't churn accounts with unnecessary buying and selling; you'll rack up fees and lose your sense of balance.
6.) Up-ending carefully laid long-term strategies by attempting to seize short-term opportunities.
Don't hyperventilate over sudden, short-term opportunities that will inevitably compete with your long-range plans. You cannot own every winning stock.
Create a strategy that's right for you and, despite the temporary vicissitudes of the market, stick to it. While you'll need to remain flexible and calibrate your strategy to account for changing global conditions, the basic framework should be able to stand the test of time.
