Published Friday, November 16, 2012 at: 7:00 AM EST
One thing that can be puzzling about stock market investors who have struggled in the past: They make some of the same mistakes over and over. Here are seven prime examples.
1. You try to “time” the stock market. Typically, timing strategies are based on selling stocks when you believe the market has topped out and buying when you think it has hit rock bottom. The problem is that nobody—and we mean NOBODY—has a crystal ball that’s foolproof. It’s far better to stick with a well-diversified, balanced portfolio based on your personal circumstances.
2. You have zero patience. If you’re looking for instant gratification, the stock market will disappoint you more often than not. Just as for the tortoise and the hare, slow and steady usually wins the race, while those who act too swiftly finish behind. Be content to hold some stocks for a long time before you reap rewards.
3. You refuse to recognize reality. All too often, investors operate with blinders on, but the cold hard facts can’t be ignored. If you have a favorite stock you were convinced would turn a profit and it simply hasn’t worked out, don’t throw good money after bad. Dump the losers and hold on to the winners without allowing emotion to rule the day.
4. You put all of your eggs into one basket. No matter what the projections are for any particular stock, sector or asset type, it’s not smart to bet your entire wealth on its performance. Diversification is a key element of a sensible plan for virtually every investor. It’s all about balancing the search for reward with the need to reduce risk. Although there’s less chance you’ll make a killing if you diversify, you reduce your exposure to a catastrophe.
5. You overemphasize past performance. It may be boilerplate language in investment prospectuses and related materials, but it’s also true: “Past performance is not necessarily indicative of future results.” Don’t build your portfolio around particular stocks just because they’ve been profitable without evaluating their current and future prospects.
6. You ignore the impact of taxes. It only makes sense to consider the tax ramifications of your investment decisions—especially now, with higher income tax and investment tax rates for high-income investors and the arrival of a new 3.8% Medicare surtax in 2013. But it also can be a mistake to let taxes drive your decisions. Weigh all of the relevant economic factors when you buy or sell stocks.
7. You don’t have a plan. Many investors take a hit-or-miss approach to their portfolio. They buy and sell on whims without coordinating their activities. But you’re more likely to be successful if you develop an overall plan that is suitable for your situation. Having a strategy and having the discipline to stick with it is the hallmark of successful investing. We would be glad to provide whatever assistance you need.
This article was written by a professional financial journalist for McCarthy Asset Management, Inc and is not intended as legal or investment advice.