Dumb Investment Mistakes and How to Avoid Them

Quantum Binary Signals SubscriptionHere are some dumb investment mistakes and how to avoid them.

Smart people sometimes make dumb mistakes when it comes to investing.

Part of the reason for this, I guess, is that most people do not have the time to learn what they need to know to make good decisions.

Another reason is that often times when you make a dumb mistake, somebody else an investment salesperson, for example makes money.

Fortunately, you can save yourself lots of money and a bunch of headaches by not making bad investment decisions.

The average stock market return is ten percent or so but to earn ten percent you need to own a broad range of stocks.

In other words, you need to diversify.

Everybody who thinks about this for more than a few minutes realizes that it is true but it is amazing how many people do not diversify.

For example, some people hold huge chunks of their employer’s stock but little else.

Or they own a handful of stocks in the same industry.

To make money on the stock market you need around fifteen stocks in a variety of industries.

With fewer than ten your portfolio’s returns will very likely be something greater or less than the stock market average.

Of course, you don’t care if your portfolio’s return is greater than the stock market average.

But you do care if your portfolio’s return is less than the stock market average.

The stock market and other securities markets bounce around on a daily, weekly, and even yearly basis.

The general trend over extended periods of time has always been up.

Since World War II, the worst one year return has been –26.5 percent.

The worst ten year return in recent history was 1.2 percent.

Those numbers are pretty scary, but things look much better if you look longer term.

The worst 25 year return was 7.9 percent annually.

It is important for investors to have patience. There will be many bad years.

Many times, one bad year is followed by another bad year. But over time, the good years outnumber the bad.

They compensate for the bad years too.

Patient investors who stay in the market in both the good and bad years do better than people who try to follow every fad or buy last year’s hot stock.

You may already know about dollar average investing.

Instead of purchasing a set number of shares at regular intervals, you purchase a regular dollar amount, such as $100.

If the share price is $10, you purchase ten shares. If the share price is $20, you purchase five shares.

If the share price is $5, you purchase twenty shares.

Dollar average investing offers two advantages. The biggest is that you regularly invest in both good markets and bad markets.

If you buy $100 of stock at the beginning of every month, for example, you don’t stop buying stock when the market is way down.

And every financial journalist in the world is working to fan the fires of fear.

The other advantage of dollar average investing is that you buy more shares when the price is low and fewer shares when the price is high.

As a result, you do not get carried away on a tide of optimism and end up buying most of the stock when the market or the stock is up.

In the same way, you also don’t get scared away and stop buying a stock when the market or the stock is down.

One of the easiest ways to implement a dollar average investing program is by participating in something like an employer sponsored 401(k) plan or deferred compensation plan.

With these plans, you effectively invest each time money is withheld from your paycheck.

Investment expenses can add up quickly.

Small differences in expense ratios, costly investment newsletter subscriptions, online financial services and income taxes can easily subtract hundreds of thousands of dollars from your net worth over a lifetime of investing.

Investment expenses can add up to really big numbers when you realize that you could have invested the money and earned interest and dividends for years.

I wish there was some risk free way to earn fifteen percent annually.

Alas, there is not. The stock market’s average return is somewhere between 9 and 10 percent, depending on how many decades you go back.

The significantly more risky small company stocks have done slightly better.

On average, they return annual profits of 12 to 13 percent. Fortunately, you can get rich earning 9 percent returns.

You just need to take your time.

But no risk free investments consistently return annual profits significantly above the stock market’s long run averages.

I mention this for a simple reason: People make all sorts of foolish investment decisions when they get greedy.

And pursue returns that are out of line with the average annual returns of the stock market.

If someone really did have a sure thing method of producing annual returns of, say, 18 percent, that person would soon be the richest person in the world.

With solid year in, year out returns like that, the person could run a $20 billion investment fund and earn $500 million a year.

The moral is: There is no such thing as a sure thing in investing.

As a practical matter, it’s very difficult for people who have not been trained in financial analysis to analyze complex investments.

Dumb Investment Mistakes and How to Avoid Them

Such as real estate partnership units, derivatives and cash value life insurance.

You need to understand how to construct accurate cash flow forecasts.

You need to know how to calculate things like internal rates of return and net present values with the data from cash flow forecasts.

Financial analysis is nowhere near as complex as rocket science.

Still, it is not something you can do without a degree in accounting or finance, a computer and a spreadsheet program.