5 Bad Investing Habits
On Monday, Tonya lamented about the habits in her life that are hard to break, and we all have bad habits that we could stand to kick to the curb. Today, I thought I would reflect on some bad investing habits that I have seen from clients. On Friday, Joe from Stacking Benjamins joins me on the podcast to talk further about investing mistakes people make.
If you find yourself a prisoner to any of these habits, then you should consider finding ways to break them, if not for your portfolio returns, then for your mental health.
#1 – Checking Your Account Everyday
I have a number of clients with this bad habit, and I think it’s the worst. I honestly can’t think of one reason why anyone should look at their investment portfolio daily, except maybe if you are a day trader or a fund manager. When you invest your money in stocks and bonds, you are bound to have ups and downs over a period of time.
It is the natural flow of the markets; however, over time, if you have constructed your portfolio properly, your portfolio will grow. If you check your investments everyday because you may need the money, then I would argue that this money should not be invested to begin with. Any money that you may need within the next six months to a year should really be sitting in a savings account at a bank so that you don’t have to stress about it’s value.
#2 – Buying Something You Don’t Understand
I have sat with clients for portfolio reviews, and when I ask them why they own something, they repeatedly tell me they have no idea why. When I ask them if they even know what it is, they can’t explain it to me. I don’t care how smart your financial advisor, friend, colleague or whoever is telling you to buy something, if you don’t personally understand it, then you shouldn’t own it.
I spend a great deal of time educating my clients on their investments and getting them to understand what they own and why they own it. When you grasp this, then you won’t make silly mistakes like selling your investments at a loss or not selling them when you should.
#3 – Selling When the Market is Down
One of the problems with checking your account frequently is that you will see some days that your portfolio is “down” and you may panic and think you need to sell to jump off the rollercoaster. I had a client who was tempted to do this back in October as she watched her portfolio value drop in front of her eyes.
What is important to note is that you only have an unrealized loss at that moment. You still own everything you owned the day or month before; however, if you had to sell it that day, the unrealized loss would become a realized loss. Until you sell it, though, it’s as if it never existed. Selling when the market is down only makes you lose money in reality as opposed to just on paper.
#4 – Buying When the Market is Up
Everyone talks about how brilliant Warren Buffett is, and he built his empire on a basic principle of buying things when they are cheap and on sale. We should all try to employ this practice in our day-to-day investing. It’s easy to get caught up in the excitement of a hot stock or hot market or you hear everyone else is doing it and you want to do it as well; however, it’s more prudent to wait out the excitement than jump with the rest of the lemmings.
There is a great reference from Joe Kennedy, father or JFK and RFK, who said that he knew it was time to get out of the market in 1929 when he received a stock tip from his shoeshine boy. I know it’s easy to feel as though you are left out of a great investing opportunity; however, what goes up, typically goes down and vice versa, and it’s best to buy when it’s down than when it’s up.
#5 – Not Investing At All
Most of us know that we should invest our retirement money and do a pretty good job at that; however, I see too many people who don’t invest beyond their retirement portfolio. I tell clients that they have three buckets of money, the first is emergency cash, the last is retirement and in between is life money or your gas for your life journey.
Your life money should be invested in a brokerage account, especially if you don’t have a need for it for two or more years. I recently met with a client who kept too much money in her checking account, and we gradually moved her to a brokerage account and now she is seeing the value of passive income at work everyday. You work hard for your money, by investing it, you make your money work hard for you in return.
Image Source: FreeDigitalPhotos.Net Photkanok