Investment Pitfalls: How We Kill Our Returns

Here's a piece from Money magazine that contains their thoughts on why so many investors have poor returns (how we kill our own investment returns). They narrow it down to three simple reasons:

• Market timing

• Buying high and selling low

• Failure to diversify

My thoughts on these:

1. I never time the market. In fact, trying to do so is a fool's game. Consider this quote from the Money piece:

The study revealed that a person who attempts to time the market needs to be right roughly three times out of four to match the performance of a buy-and-hold investor.

That's why I buy and hold. ;-)

I simply invest at regular intervals (monthly for 401k as well as other investment accounts) again, again, and again. When others are panicking about the market falling, it doesn't really affect me. I have an overall belief in the U.S. economy and simply keep investing. In fact, I don't follow what the market does on a day-in day-out basis. Why should I?

Overall, I prefer the investment philosophy I discussed in Free Money Finance Guide to Getting Rich. It's worked for me so far, and now that I've gotten a decent amount invested, the power of compounding is REALLY starting to work for me.

2. I can only laugh at this one. Of course no one wants to buy high and sell low. It's funny to me that Money lists it as a way to hurt your investment performance. Duh!!!!!

3. The key culprits here: putting too much of a portfolio in company stock and not using proper asset allocation techniques. My company doesn't offer stock (it's privately owned), so I'm ok there. However, I am working on getting my assets allocated correctly.

Comments

[Stock Mama]

Buy high and sell low doesn't sound rational, but smart people still get suckered into it anyway. It all starts with that hot stock tip, or that news item you catch on the radio as you're driving to work: "Melagomaniac Amagamated stock took a surprising leap today..." or "Gold prices continue to soar..." Herd instinct kicks in and before you know it, you're thinking, "Gee, maybe I ought to get in on that," just like a few years ago, people were saying, "Gee, maybe I ought to get an Italian charm bracelet, too." But by the time you're hearing the reports, the stock has just about peaked, so that if you do drop some of your hard-earned cash on it, within a short time the price drops. And drops some more. And drops again. Gasp! Hoping to prevent even more losses, you dump the stock like a hot potato, and walk away shaking your head, muttering, "Gads, I really don't understand stocks."

Which is why investors really need to educate themselves and have a good plan before they buy.