THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.
Stop comparing yourself to your social media friends.
My social media accounts are filled of pictures of kids, amazing vacations photos, and then of course various humblebrags. Everyone seems to have picture perfect lives on social media. Even some of the negative stuff is usually broadcasted into something comical or positive. Normally my social media consumption doesn’t affect me or make me envious. However, I have a couple of social media friends that love to talk about their amazing stock-picking abilities.
They always seem to pick winners. But they tend to talk about the stock after the fact. They never say, “I bought Amazon stock today at $900” or “I bought Facebook today at $160.” It’s always, “I bought Amazon at $250 six years ago.”
I wonder how many dogs that they bought along the way to get that one winner. I have a feeling that their portfolios may not be as grand as they make it appear.
So my advice: don’t always believe the hype.
Create clear investment goals.
Many people think that by picking great stocks or passive index funds, they will become rich overnight. That’s not exactly how it works.
Having your account rise over time is a goal, but it’s not a clear goal. Set up a plan that allows you to figure out how much you need for retirement. Then you can work your way backwards into how much the account needs to grow to.
In addition, you must understand the risks that are involved with the plan that you put into place. It’s unrealistic to think that you are going to get 20% returns every year, especially in light of the amount of risk you may undertake.
On the other hand, if you try to play it too safe, a savings account may not yield the returns you need. So, it’s important to have a goal number and then a return that makes you feel comfortable.
According to psychology professor Dr. Gail Matthew, by writing your goals down, you are 42% more likely to achieve those goals and dreams. So grab a pen and a paper, and start writing!
Don’t put all your eggs in one basket.
I call this the Enron rule. Many thought that Enron was an indestructible energy company during the dotcom era. At the time, Enron blew earnings out of the water. As a result, they actively encouraged their employees to buy up as much stock as possible.
The only problem was they were cooking the books and lying about their profits.
After they unraveled, shareholders lost a ton of money. Many lost their retirement fortunes because they hadn’t diversified.
Speaking of diversification, do you know why there is such a high turnover on the Forbes Richest People List? It’s because a lot of rich people have large concentrations in their company. If/when their company’s stock price goes down, they lose the fortunes that they had amassed.
Eike Batista, a Brazilian magnate, was once the 7th richest man in the world. But when his energy empire collapsed, he nearly lost it all, $19 billion.
So putting all your eggs in one basket can make you a lot of wealth at one point, but it can also cause a lot of heartache if you aren’t diversified at all.
Stop worrying about the short-term.
I was once one of those annoying people that checked the stock market multiple times a day to see how my investments were doing. It was a good feeling when my investments were going up. When they were going down, I was definitely in a very sour mood.
However, I snapped out of it when I realized how much time I was expending by checking. Plus, I wasn’t even altering the way that I was trading by doing so.
One of my favorite quotes from Warren Buffett is, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Stop buying at the top and selling at the bottom.
Everyone hears the old adage buy at the bottom and then sell at the top. The only problem with this is that most people wait for the market to turn around before they start to buy again. This is oftentimes after the market has recovered, missing out on most of the gains.
In contrast, when the market is lousy, people are more likely to shed their holdings thinking that the market will drop even more.
Like I always advocate, stop timing the market. Buy your position, and then leave it alone. You’ll do much better in the long-run.
Stop jumping in and out of stocks.
I use to have this philosophy that I would buy a stock and then sell it as soon as it went up a dollar or two. It was nerve-racking as I needed to stay close to my computer or phone to make sure that I could put in a trade or see if a trade had executed when I got close.
On top of that, I felt miserable when the investment would go down.
It had all the feelings of gambling. Yet, I honestly didn’t really know what I was doing.
I still remember buying Nvidia stock back in the early 2000s for $27. It then went on to do a 2 for 1 split and a 3 for 2 split. Meaning my original investment would have a cost basis of less than $10.
Today, Nvidia is over $150, which would be 1500% on my investment. In contrast, I walked away with a 3% return on my investment when I sold it after it went up a dollar. Not my finest moment.
Speaking of jumping in and out of stocks, all of those trading fees can really add up over time. Back in the day, I was paying $10 a trade. Fees from jumping in and out of the market accumulated very quickly.
On top of that, I also had a mutual fund that I thought was great, until I started using Personal Capital, which is a free website that analyzes your investments for free.
Don’t believe me?
Check out your investment’s performance, and see how much fees can kill your performance. You could be saving thousands of dollars a year by paying close attention to fees.
Once I learned how much the mutual fund fees were hurting me, I opted for passive index funds. These funds yield a better return for a fraction of the cost.
Be like Goldilocks, don’t review your performance too little or too much.
It’s one thing to obsess about your portfolio’s performance, but it’s a whole other story to pay too little attention.
I have known people who haven’t checked their performance for years. One person in particular trusted his financial advisor deeply. However, it backfired when this individual actually looked into his portfolio and learned that his financial advisor hadn’t been putting his client’s needs first.
The financial advisor was continually buying financial products that didn’t make sense for this individual. Unfortunately, the price of those poor decisions ended up costing this client hundreds of thousands of dollars over the years.
Stop reacting to the media.
It’s easy to get emotional based on external circumstances.
My mom asked me the other day what I thought of the rhetoric with North Korea and how it would affect the stock market. I told her I honestly didn’t know. However, I wasn’t planning to alter my investment portfolio if things were to happen.
History has shown that some sort of conflict can potentially rock the market. The market always seems to take time to digest the information and later go up over time.
So I told her to tune out the noise and listen to Benjamin Graham.
Benjamin Graham is famously quoted as saying, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Stop timing the market.
As you may have read from a recent post, it’s nearly impossible to perfectly and consistently time the market. Even seasoned pros have a difficult time doing this, and they spend all their time trying to do so.
I don’t know what I was thinking when I first started out and thought that I could beat the market by timing it. I only had a fraction of the time and resources that the seasoned pros had.
Since then, I have stopped timing the market and am happy to report that my stress levels are down. I worry less about the market’s behavior and don’t feel the pressing need to determine if now is a good time to buy.
Do your own research.
I don’t understand the appeal of Jim Cramer or any of the other talking heads on TV. They scream to “buy buy buy” or “sell sell sell” certain stocks.
If I wanted to get yelled at, I’d stay at work. I don’t need to turn on the TV to hear more screaming.
I’ve had friends’ parents tell me how much they love watching these guys and that they receive all their financial tips from them. Clearly many people watch this programming as they are high-performing shows.
I do know that some people specifically take the opposite action of what Cramer recommends, and they have profited handsomely.
Listen to people that you trust.
This is something that I definitely don’t do enough. There are times that my wife will feel uneasy about a stock purchase that I’m about to make. She will let me know of her hesitancy. The times that I’ve listened to her wisdom, I’ve dodged some really terrible potential trades.
On the other hand, the times I failed to heed her advice, I almost always regret it.
So I encourage finding someone that you trust to bounce different ideas off of before you execute on a trade.
Watch for falling knives.
I am guilty of experiencing this one. When a stock is going down in a hurry, you may think that it has great value potential.
This was the case with Chipotle, after the E. coli crisis. I thought it was a great opportunity to buy a solid company. I assumed they would quickly get over the scare and put all of that mess behind them, like so many other companies have done in the past.
Boy, was I wrong.
It seems like Chipotle can’t catch a break. Unfortunately from my market research, people are clearly eating elsewhere. I really shouldn’t be surprised as the stock continues to trend down. The whole situation taught me how it isn’t always wise to buy individual stocks.