Hey, all! Felicity here, announcing a guest post from Troy of Market History. Troy’s site is a treasure trove of detailed, historical market data. You’d be hard-pressed to find a more comprehensive source, short of paying Bloomberg half of an average household’s income. Additionally, Troy explains historic market actions for those of us who are a little more clueless. Ever wonder why the dollar peaked in 2001 and 2002? Or a quick summary of all the peaks and valleys, with corresponding news events for any given year? Troy’s got you covered.
Troy also goes a bit against the grain compared to the typical early retirement / Financial Independence Retire Early (FIRE) blogs, in that he doesn’t put all his investments in index funds and walk away. He thinks it’s very possible to have above average returns by doing your research and timing the market based on fundamentals. While this is likely not a viable approach for everyone (we can’t all be Troy), it seems to work well for him. This post is keeping it simple with advice for everyone, though!
Take it away, Troy!
It’s hard to say exactly what investors SHOULD do because there are so many different investment strategies. There is no single “best” strategy that will outperform all the rest. However, there are certain things that no investor should ever do, regardless of his or her investment strategy. Once you know what you shouldn’t do, the field of things that you can do becomes much narrower.
Never invest in an asset just because someone else is doing it
Many investors don’t want to spend much time on their investments. There’s a joke in the book Reminisces of a Stock Operator saying “many investors spend more time on deciding what car to buy than they do on deciding where to invest their life savings.” Sad but true.
Tips come from 2 sources: marketers (people who make money by telling you how to invest), and family or friends.
You should completely ignore tips from the first source. This kind of tip comes from people such as Jim Cramer who have dubious investment track records. If the individual makes his living off of telling others what to invest in, the odds are high that he is not a good investor himself. Think of it this way: If his investment tips actually worked in the real world, why would he still be a full-time marketer? He wouldn’t. He’d be actively investing his own money.
With regards to tips from family and friends, here’s what I think. You can listen to those tips, but do not solely invest a stock/asset just because your family/friend recommended it. They could be wrong. Your brother probably is not much better at investing than any random person on the internet/blogosphere. Always do your own research.
Never use leverage
Using leverage is when you borrow money to make an investment. Aside from mortgages, leverage is ridiculously dangerous. I know people who bought silver with 50% leverage (i.e. they paid half, borrowed the other half) and lost all their money when silver fell from $50 to $25.
The thing about investing is that you want to be able to buy and hold. Although I do not believe in buying and holding, I recognize that there will be times when my portfolio is underwater. In those situations, I can choose to just hold onto my position until it’s above water. However, leverage takes away this luxury from the investor. If an investor is leveraged, he cannot wait until his position is back to break even. He will be forced by his broker to sell his position at rock bottom prices.
Never marry your position
Some people just can’t take a loss. Some people just can’t sit on the sidelines and wait for the uncertainties in the market to clear up. Ironically, this impatience causes investors to lose even MORE money.
If you don’t feel comfortable with your position, just sell it right now. Perhaps your gut is telling you that something isn’t right, but you can’t quite put your finger on it right now. If you sell your position now, you can always buy it back when your market outlook is very clear again. You might miss out on some short-term gains, but you might also avoid a big loss. Remember Warren Buffett’s 2 main rules:
- Rule #1: Don’t lose money.
- Rule #2: Follow rule #1.
If you lose 50% of your money, you’ll need to make a 100% return just to get back to breakeven.
For example, I was in cash throughout most of 2015. I thought the U.S. stock market would fall 15%, and it did. I was rewarded for my patience, and now that I’m bullish again on U.S. stocks for the long term, I am 100% invested in stocks.
Do not push yourself too hard as an investor
Do not push the envelope too far. If a position has yielded a significant profit, be content and take that profit. If you find yourself thinking “I just want to squeeze a little bit more profit out of this investment”, then you should probably sell the position. Holding out for the final tiny bit of gains is very dangerous because the market might reverse and crash. Never underestimate how quickly and fiercely the market can reverse, especially in this day and age in which volatility has increased dramatically.
So when your position has made a sizable gain and you are no longer very bullish on your investment, just sell it. Be satisfied with a good return. This point has been reiterated by some legendary investors and hedge fund managers such as George Soros. Soros said that one year, he made 30% by October. But he wanted to be at 40%+ by year-end, so he worked day and night in November-December. By overworking himself, he actually LOST some money in November and October, putting himself further away from his 40%+ goal. He started making investments that weren’t particularly attractive, which resulted in some losses.
The moral of the story is simple. Decent, above-average returns are much less risky than “great” returns. To achieve great returns one must also take on a lot of risks.
2 thoughts on “4 Things You Should NEVER Do When Investing”
This is a great post! My favorite point of Troy’s is the last: be satisfied with a good return. So many financial mistakes are committed because of greed. I like how he couches his advice in terms of risk: an above-average return is much less risky than a spectacular return. Thanks for an excellent summary of investing rules.
I’ve seen a lot of investors and traders blow up their portfolio because “I just want to make an extra 2%”. In the markets and in life, sometimes doing less is more.