6 Horrible Investing Mistakes

It’s scary times for investors, so Bankrate has “6 Deadly Investing Mistakes” to avoid, most of which involve you not freaking out.

1. Panicking over market fluctuations
2. Reacting to daily economic reports
3. Turning off your buying during a downturn
4. Trying to time the market
5. Not maintaining appropriate asset allocation
6. Abandoning your investment strategy

These days, sometimes putting my standard portion from every paycheck in my mutual funds feels like tossing coins down a wishing well, but I plug at it anyway, knowing someday we’ll pull up from this dive.

6 deadly investing mistakes [Bankrate] (Photo: Getty)

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  1. I bought Union Carbide stock after Bhopal. I love timing my purchases and swooping in after the sheep have fled a stock.

    • Mr_Human says:

      @Corporate-Shill: I don’t believe you. You’re just trolling. And if this is true: yikes on you.

      • Consumerist-Moderator-Roz says:

        @Mr_Human: Please don’t rush in and call someone else a troll or other names. Respond civilly.

      • @Mr_Human:

        No Insult taken.

        Not Trolling.

        My broker thought I was …. I believe the phrase was “sick bastard” …

        I got out in about a month with a nice 10% cleared profit (after commissions).

        13 months later the stock was nearly 3x my buying price. I kicked myself for not staying in for the long haul.

        My best “contrary to the market” purchase I ever made. I have been burned more than once, but when you buy contrary to the sheep there are profits to be made.

  2. ceriphim says:

    Had a friend whose roommate who practiced all 6 of the above on E*Trade, daily.

    I can’t really decide whether his oxy addiction influenced (or was influenced by) the above idiocy, but he definitely lost thousands and thousands of dollars he didn’t really have.

  3. Con Seannery says:

    If you’re in it with a stock for the long haul, times like these are the best! You can buy low, and wait for the wave to come back up. I mean, aren’t, theoretically, people supposed to keep the market stable by buying when the chips are down and then selling when they get too high?

    • Jonbo298 says:

      @Con Seannery: Ideally that’s how it is to work. Unfortunately, humans have gotten a mindset of wanting a return NOW! NOW! NOW! rather then just waiting and getting more in the end.

      Same reason why investors think FiOS is not worth investing in, because they are seeing a loss NOW, rather then seeing a greater return LATER and even more. The cycle will never end unfortunately.

    • Colage says:

      @Con Seannery: That’s more or less a violation of #2: Reacting to daily economic reports.

      If an individual stock – even a blue chip – is down, it may not come back up. The company may tank under the economy. And really, individuals are wiser to invest in a managed fund, where the fund manager will take care of keeping the market stable by buying low and selling high.

      Even all that aside, keeping a consistent strategy is the best approach no matter what way the graph is pointing.

  4. sonneillon says:

    For most people the amount of money put into the investment should be constant through boom and bust and should be an active reflection of the market. Index funds make this attractive because of a fairly predictable (in terms of decades) %10 per year return. (the market average) So I don’t have to beat the market but 1000 per year until I retire in 40 years means I will have a nice little nest egg. I don’t have to be savvy I don’t have to have good timing I just have to be consistent and the market forces will do the things they always do.

  5. papahoth says:

    The book “A Random Walk Down Wall Street” still says all you need to know.

  6. god_forbids says:

    And yet, #2 and #4 are the same things that experienced investors do to earn their crazy monopoly money. A finance guru friend of mine covered his most recent round of shorts on Thursday, stacking another $16K on top of the $15K he pulled last month buying human misery.

    Of course, my shares in the “safe” index ETFs are tanking (I am a total beginner). Whoo-hoo :(

  7. ZeshawnWhiles says:

    Does anybody know of any good sites that give examples of simple asset
    allocation strategies, with historical performace?
    I know i need to allocate my assets, but it’s hard to find any good
    guidelines for how to do so. Currently I have 4 ETFs – 50% in large cap,
    20% small cap, 15% Foreign, and 10% REIT.

    It’s performed relatively well, but I know it could use some tweaking still,
    or perhaps I should add some more ETFs to diversify more?

    • moore850 says:

      @ZeshawnWhiles: Maybe look into some inflation protected securities, or other index investments. Once you have money going into a lot of different stocks, you’re about as protected as you can be within the world of stocks.

  8. Oxzimmaron says:

    What if you’re already retired, like me? My stock fund is part of my deferred comp account, and there’s no more money going in there to buy stock low. Fortunately, I have a pretty good cushion there, and money tucked in other, safer, things. Also, I’m very fortunate to have had a government job that came with a defined benefit pension – not likely to go away since the politicians dip into it too. I really worry about my son and the rest of the younger generation who will never see the security that kind of pension offers.

    • wgrune says:

      @Oxzimmaron:

      You and me both. I am in my 20′s and I can tell you that there are A LOT of people my age and older who don’t save ANY money for their retirement. What is going to happen in 20 years when millions of people decide they wan’t to retire on their $14,674 IRA/401k/Savings Account? My guess is the government will bail them out too. It seems to be a common theme lately.

      • wgrune says:

        @wgrune:

        Oh, and forget about Social Security. That will be logn gone by the time I retire. I am pretty happy I have been paying in to that since I was 16…

  9. nsv says:

    I confess I’m turning off my buying right now. Coincidentally, I’m also wondering how to pay the rent.

  10. sleze69 says:

    7. Buying SIRI when it was at $8/share

    (grumble)

  11. TheFlamingoKing says:

    “…but I plug at it anyway, knowing someday we’ll pull up from this dive.”

    How do you know? Is this a faith thing?

    From what I’ve seen, the government is printing money hand over fist to cover the banks and mortgage companies just to keep the financial system from total collapse. However, a collapse is inevitable; we’re just delaying it so maybe the baby boomers don’t have to deal with it.

    • harvey_birdman_attorney_at_law says:

      @TheFlamingoKing: Exactly, those who think we’re headed for another boom are out of their minds. Our economy is dead, we just don’t know it yet.

    • Orv says:

      @TheFlamingoKing: It all depends on your time horizon, really. The Great Depression was a lot worse than this, but the market recovered in a couple decades. Japan recovered from the Asian collapse in the 1990s in about a decade. The U.S. economy will recover from this, too. If you need your money in the next ten years you probably shouldn’t be putting it in stocks, but if your time horizon is longer you’re probably better off in the stock market. It’s the only type of investment that reliably beats inflation.

  12. no.no.notorious says:

    if you have a well diversified portfolio, then you should be making at least SOME money, even during “times like these.” There are still business that are doing well

  13. mike says:

    Playing the stocks is only good if you can pay attention and be alert. Some people have a second sense about this stuff.

    For example, when the economy started to down-turn, a friend of mine suggested investing in Walmart and Target because they were discount stores and more people will be shoping there.

    I decided against it and now regret it. I did end up buying walmart eventually, but didn’t make as much of a killing.

  14. frankthefink says:

    I invested $25,000 of imaginary money on building a Yahoo finance portfolio. I bought up a little of what I thought was going to get bigger, and I bought up the stocks that were recommended to me by finance sites. In my first week I made $10,000! I did a lot better than the finance sites, but the net result is still a portfolio that is worth $8,000 less today than it was 4 months ago! So I am just sticking my money into an IRA. If this had been my actual money, I’d be pretty damned sick right now.
    Lesson learned: reacting to any day’s financial news is silly unless you also plan to react to financial news daily after that.

  15. Apeweek says:

    Okay, I take issue with some of this.

    Most of the advice is sound. But the market is not the same as it was in, say, 1998.

    Look at a *very* long term chart of the market, and you will see long periods after the great depression, or after the lousy economy of the 70s, when stocks would have sucked the life out of your money for a decade or more.

    Some market timing during periods like these – or like the period we are in now – is *essential*

    Don’t use your emotions to time trades. You might as well not bother. Use a professional, or a professional service, with a verified track record. (Check out timertrac.com , they independently review timing systems.)

    Some free examples that I use: tradewhen.com and sniper.at (and there are many other good ones, like timingcube.com , that cost lots of money.)

  16. teknowaffle says:

    what about taking all your money, going to vegas and putting it all on red?

    Would that be bad?

  17. adamcz says:

    Mr. Popken, is there any rational reason why you are putting money into a mutual fund at all as opposed to an index fund? Only 1 out of 5 mutual funds match the performance of the indices, and no casual investor has the acumen to identify that select 20% who will do so in the future (though the ones who happen to do so will believe they have the magic touch).

    I wish more effort would be made in educating the public about just how hard it is to beat the market. I see it written all the time that you should “seek advice from a professional financial advisor,” but never the disclaimer that barely any financial advisors actually have the skill and discipline to beat the market themselves. Look up the stats! You don’t think the 4 out of 5 mutual fund managers who lose to the indices have degrees in finance or CFA cerifications?

    And what about the financial writers who recommend stocks and funds on all the major financial websites? How many of them have the market-beating track record to justify selling advice? Barely any.

    Almost nobody beats the market. Not casual investors, not financial advisors, not mutual fund managers, not Jim Cramer or other talking heads, and probably not you, unless you are devoting a lot of time to calculating the economics of the underlying business you are buying and selling, and remaining more rational than everyone else.

    So just index.

    • Apeweek says:

      @adamcz:

      Regarding how hard it is to beat the market, and how people need to be educated about this – true, almost nobody can do it – which is why more than half the trading is now done by computer. Which means a computerized system can help ordinary folks like us, too.

      Try this google search: trades verified timertrac

      In the results you will find many Timertrac charts of various stock market timing systems, showing performance that does indeed beat the market.

      Timertrac is an independent review service that tracks computerized trade timing services.

      • Orv says:

        @Apeweek: Seems like if this actually worked, everyone would be doing it…which would mean it wouldn’t work anymore. ;)

        Reminds me of those people selling investment books. If they were really successful investors they wouldn’t need to sell books for a living.

        • Apeweek says:

          @Orv:

          “Everyone” is indeed doing it. Remember, more than half the trading on the stock market is now done by computer.

          It will stop working if everyone does the same thing. But there are many different statistical approaches to trading, not just one. Indeed, this is always the key – don’t do what everyone else is doing. Hence the common wisdom is nearly always wrong.

          I keep pointing to Timertrac because it is critical to have any potential investment strategy backtested and independently confirmed.

  18. adamcz says:

    Posted by Apeweek: “Regarding how hard it is to beat the market, and how people need to be educated about this – true, almost nobody can do it – which is why more than half the trading is now done by computer. Which means a computerized system can help ordinary folks like us, too.”

    What a dumb sales pitch. Why would I want to copy what “everyone” is doing, when 4 out of 5 of that group fails to beat the market? I bet you’re right that using a computer timing system could cause 4 out of 5 of us “ordinary folks” to get crushed by the market just like the pros!

    You know what system is truly backtested? Indexing. By definition, you will match the performance of the market.

    But out of interest, show me some individuals with billion or ten billion dollar net-worths who made their fortune with your computer strategy.

    • Apeweek says:

      @adamcz:

      Not to keep repeating what I’ve been saying, but this is about verifying the performance of specific strategies. That’s the purpose of review sites like Timertrac. The systems send their trade signals to the review site, and charts there are built based on the same info given to the users of the systems. This is how we know the performance is real.

      Everything is a strategy. Your index funds are a strategy as well. So pull up a chart of past and recent performance of an index fund, and compare that chart to some of the systems I have been talking about being tracked. Which has done better? Which is doing better now? That’s the only thing that matters to me.

      Bottom line, sorry, I’m not picking your strategy because the charts clearly show it doesn’t even come close to my strategy.

      Re: millionaires and billionaires, sorry, that’s a whole other game – no matter which strategy you use. I doubt you can show me billionaires who just invest in index funds either.

  19. Sure you can time the market. pull up a 20+ year chart of the S&P 500 (or its proxy, SPY). Chart the 20 and 50-week moving averages.

    When the 20 is over the 50 by more than 1-2%, that’s a very strong indicator of an upward trend. When it’s not, it’s not, and we crossed that point right at the end of last year.

    Go long with a confirmed bull signal, and go short or to cash on the other side. e.z. you will miss the exact high/low, but who cares. I have been in cash-equivalent funds since 9/07 and haven’t lost a cent, except of course to inflation. If I’d known about this signal then I would have stayed in for the Oct high, but whatever.

  20. Apeweek says:

    Some visuals to go with my last post:

    Here’s a Timertrac chart of a computerized system (this one is Equitrend.) It is compared with an index on the same chart:

    [equitrend.com]

    This one is not a Timertrac chart (it’s from Tradewhen), but it’s even more dramatic – the index is the pitiful line on the bottom:

    [tradewhen.com]

  21. Landru says:

    I moved my money into cash a long time ago. There it stays until things get better. I might miss the initial jump on the uptick, but I missed a whole lot of downturn and devaluing, unlike most of my coworkers who still can’t believe how much money they have lost from their 401K.

  22. tz says:

    The Nikkei reached its peak of 39,000 in 1989. It hasn’t seen more than half that this decade. The S&P 500 reached 1500+ in 2000. Where is it 8 years later? The Dow reached 1000 in 1966. It bounced and finally crossed in 1982.

    And if you lose your job or can’t pay your debts, you will be pulling money out of your account AT THE BOTTOM. If we have a bad recession you will lose half from the market tumble, then lose another half because you can’t stay invested.

    That said, there is a trivially simple (you can calculate it weekly in a minute or two on an enevlope) indicator. If you take the 20 week and 50 week moving averages, put your (and new) money into stocks (e.g. an S&P 500 fund) when the 20 week moving average on the S&P 500 is 1% or more above the 50 week moving average. If the 20 drops to more than 1% below the 50 week (as it has and is now), then go to cash – money market, treasuries, FDIC account, whatever is 100% safe, but keep adding what you can and wait until the 1% upside cross occurs.

    You can get weekly closes at yahoo finance or other places. Just grab the last 50 and calculate the average of the last 50 and last 20.

    This technique goes back to early last century when they didn’t have computers and it still works. I found out about it from Karl Denninger’s site [www.denninger.net] but can’t find a post (he had videos posted, but I don’t know which if any detail it).

    You wouldn’t have rode the S&P down from 1500. You would have banked profits, watched it go to 800, then got back in around 900 and rode it back up till just under a year ago. And you’d be in cash now. You would keep doubling instead of doubling, losing half, doubling, losing half…

    This has worked over the last two decades getting you out just after the top and avoiding the drops.

    Remember that it takes a 25% gain to get back a 20% loss (100->80->100, 80 is 20% less than 100, but 100 is 25% more than 80).

  23. tz says:

    In the interest of full disclosure, today I’m 100% in a 2x inverse Russel 2000 fund (TWM) because I’m expecting a market crash, dislocation, or a bunch of 1-2% down days over the next few months. I may go further short or I may be out tomorrow. But I’m a bit more active than most. If I wanted to be mostly inactive (and I can’t go short in a 401k) I would use the above indicator.

    • Apeweek says:

      @tz:

      I plugged your system into my stock software, and it performs pretty well, considering the simplicity.

      Backtesting with SPY (an exchange-traded fund) from 1992 to the present shows a return of 323% compared with 192% from buy-and-hold. And that’s with just 3 roundtrip trades in over 16 years, all profitable trades. Not bad.

      • tz says:

        It is simple, and keeps you in cash when there is a good chance of losing lots during recessions (when you and/or your spouse might lose your job, you can’t put more on credit cards, etc.). SPY is basically SPX encapsulated. Did those returns include dividends?

        It isn’t mine, it is one of those old-timer’s timing techniques, along with dow theory that can be done with pencil and paper.

        It only blew it back in 1957 (Yahoo only goes back to 1950). You don’t get out at the top or out at the bottom, but you also don’t hold through long down drafts. There seems to be some psychology that the S&P should be over 1500 again so any money you put in now is guaranteed to grow 20% “sometime”. But they are right that you can’t time the market exactly – get out at the day of the top and in at the day of the bottom. The problem is when things start falling, they can go down far and fast and stay down a long time. You can pretend that by the time you retire the SPX will have gained 10% per year from 2000 and its peak of 1500 (although GDP isn’t going to grow at that rate, and the market – ex-inflation – can’t grow faster than the economy as a whole for very long). Or you can be content with smaller but more reliable gains.

        Also note between 1969 and 1979 there was practically no gain in the SPX (at a time of inflation – you would be getting a lot in safe bonds though when you were out, and I don’t think they count dividends when in), but the system managed to work even then.

        The returns are a little less or more because they are actual, not annualized and I don’t have a source for T-bill interest for the out periods. A bear market is where it drops 20% – even in 1957 you only lost 15%.

        There are some people who can time, and others who can pick stocks. Back in the mid-1980s it was Peter Lynch at Fidelity and the Magellan fund. It was Munder Net-Net in 1999. Warren Buffet and BRK seems to do well, but even that isn’t near its highs. The problem is what worked yesterday doesn’t work tomorrow.

        (I used the 20wma/50wma and when it was over 101% it was an entry, under 99% was an exit – starting entered as it began over 100%)

        date SPX Gain
        12/11/50 19.33
        07/06/53 24.41 26.28%
        02/15/54 25.92
        01/14/57 44.64 72.22%
        07/29/57 47.68
        11/04/57 40.19 -15.71%
        06/30/58 45.47
        03/21/60 55.98 23.11%
        02/06/61 61.5
        06/04/62 58.45 -4.96%
        02/18/63 65.92
        06/27/66 85.61 29.87%
        03/20/67 90.94
        06/30/69 99.61 9.53%
        12/21/70 90.61
        11/22/71 91.94 1.47%
        03/13/72 107.92
        06/11/73 105.1 -2.61%
        04/21/75 86.62
        05/09/77 99.03 14.33%
        07/24/78 100
        03/05/79 99.54 -0.46%
        07/16/79 101.82
        09/08/81 121.61 19.44%
        11/01/82 142.16
        03/19/84 156.86 10.34%
        11/05/84 167.6
        12/14/87 249.16 48.66%
        09/06/88 266.86
        10/15/90 312.48 17.10%
        03/25/91 375.22
        06/27/94 446.2 18.92%
        02/21/95 488.11
        12/18/00 1305.95 167.55%
        06/23/03 976.22
        02/11/08 1349.99 38.29%

  24. tz says:

    Genius@work beat me to it, but I think I gave more detail.

    You can do complex technical analysis, and can time the market, but it is hard, requires you to be totally unemotional – when a level is breached, or an indicator turns, you enter or exit the trade. Most people can’t – I have difficulty too, not cutting losses and not riding trends too far. It is a lot of work and very hard and may not be worth it.

    But saying you aren’t timing the market means you are timing the market – you expect a gain greater than treasuries or a money market fund or a CD over whatever period is in question. That you don’t have a strategy is that your strategy is to throw money and pray.

    When is Enron or WorldCom going to come back? GE is still in the Dow, unlike the other 20 stocks (some have gone in and out). Survivor bias is part of things. The S&P had a very different weighting in 1982, 2000, and now.

    And don’t houses always go up in value? And isn’t Gold safe?

    Even with the above, there is no reason to trust the next decade will be anything like the last few. One nuclear bomb can ruin your whole day. And your portfolio. The US may not be Argentina or Brazil, but I would worry about the currency and debt. There is no physical law saying we can’t do enough stupid or shortsighted things to collapse our country. Though that would be the ultimate time to buy – if there was anything to buy with.