There are several common mistakes that many investors make when they view their investments.
- Comparing your investment results to the S&P 500.
- This is the biggest error people make. The returns you should be concerned about are those that you require to meet your objective. Most people have some objectives that involves money. It could be a certain level of income, a certain level of wealth, a specific home or other lifestyle objective. But none of these are tied to a stock market index. Everyone who wants to beat the S&P 500 as it goes up 50% must realize that they may well go down over 50% if there’s a repeat of 2008.
- Viewing the future through a rear view mirror.
- Too often people will buy last year’s top stock pick or “Hot” mutual fund. There’s a reason why prospectuses always say “past performance is no guarantee of future results.” I vividly remember as the year 2000 approached and the Dot.com bubble was peaking. Money was pouring into internet and tech stocks and delivering spectacular results. But then the tech bubble burst and those who invested because they believed that those returns would continue lost their savings. Since then we have seen other bubbles – including the real estate bubble – burst. People lost their homes and their dreams. It’s dangerous to view the future by looking backward.
- There’s no such thing as a free lunch.
- If something looks too good to be true, find out what the catch is. Some are simply scams by crooks who want to sell you worthless securities. But there are investment products out there that seem to be too good to be true. But that’s because the people selling these products don’t tell you the downside or won’t explain what can go wrong. One example were the “structured notes” that were offered with a guarantee against loss. The problem was that the guarantee was issued by a company that went bankrupt. Insurance products are sometimes sold without sufficient explanation.
Quite often, the best thing that you can do is to ask the advice of an RIA, an experienced financial advisor, a fiduciary, who is can provide unbiased advice and has the knowledge and experience to know what to look for and what questions to ask.