Three Things to Avoid to be a Successful Investor
For years, Wall Street has had no shortage of opinion on how investors should invest their money. The information is so dense, that there is a bit of a fog in the industry. This leaves investors without much (if any) clarity on exactly what to do with our money for our American Dreams.
There are three things they want us to believe in order to be a successful investor:
We can pick the right stocks.
We can learn how to time the market (i.e. get in at the bottom of a rush and to get out before things crash).
If we can’t (or don’t) want to do this, we can choose a fund manager to do it for us.
Let’s take a closer look at each of these.
First, Wall Street teaches that successful investors know how to pick and choose the right stocks and/or bonds to buy. There are investing shows on tv, called investainment, that inform investors what stocks or bonds they should buy or sell. Their belief is that you can pick and choose the right companies to invest in and maximize your return.
The bad news is that there has been study after study showing that although people try to pick the winners and losers, that they cannot do it over the long haul. And, in the attempt to do so, investors actually underperform the rest of the market.
Second, Wall Street teaches that successful investors know how to get in the market before a rush and how to get out of the market before it crashes. I remember seeing an infomercial on how to do exactly this and if I buy their “leading edge” software, that I can watch for the “markers” and know when to get in and out of the market. I can remember feeling desperate enough to make some money and a strong pull to buy this software. I didn’t end up buying it, though I think there is a reason that they air these infomercials in the wee hours of the night.
The bad news here is that although there are lots of companies trying to sell us software, the truth is that timing the market wrong is very costly. Even missing as few as 5 of the right days to jump in and out of the market over a 20 year window can create catastrophic results in your portfolio.
Third, Wall Street teaches that successful investors work with the best mutual fund managers who will choose the right stocks and time the market successfully. They point backwards to their 5-year track record, or a 10-year track record that shows that they did it and then claim that they can do it going forward.
The truth here is that the past performance of any mutual fund manager has little to no correlation to their ability to perform that well in the future. In other words, you can’t rely on their track record to give you an indication of how things could go in the future.
There’s a reason every investment has the disclaimer that past performance is no guarantee of future results. But the industry wants so badly for you ignore this warning and to believe that there is someone who could actually do it.
If you are trying to pick the right stocks, time the market, or use a manager’s track record to pick the right fund, it is possible you could be heading for an investing disaster. These are three things to avoid if you want to be a successful investor.
The biggest problem with all three of these tactics is that it requires someone to know the future in order for these to work consistently. The truth is that no one can predict the future and therefore no one can successfully tell you which stocks to pick, when to get in and out of the market, or be able to point to their track record and say that this will be indicative of the future.
Next time, we’ll take a look at three things you CAN do to become a successful investor.
