Despite the fact that the S&P 500, on average, offers returns far better than keeping your money in cash, many people are still too afraid of making mistakes to invest in the stock market. I know, because I felt the same way before I started investing in stocks in 2012. But as a successful stock investor who now consistently beats the S&P 500 and most money managers, I want to share what I have found to be the four biggest mistakes investors tend to make — and how to easily avoid them.
1. Lacking Confidence to Get Started
This is a mistake I made early on. Before I started investing on my own, I engaged a money manager who invested my money in mutual funds. I didn’t have the confidence to overrule his advice and, as a result, lost 40 percent in the 2008 financial crisis. This was a wake-up call that I had to take control of my financial future. But it wasn’t until I gained confidence using Chaikin Analytics to identify winning stocks that I realized I could make better returns on my own.
Facts to consider:
● Women, especially, lack confidence: 72 percent don’t feel confident making financial decisions on their own. (Fidelity)
● So, they put their trust in their spouses or a money managers, or hold too much cash. Almost two-thirds (63 percent) of all American savings and investments are held in cash, which actually loses 2 percent each year due to inflation. (Blackrock)
● Investing in stocks is still the best way to grow your portfolio, because it’s gained on average 11.1 percent a year for the last 30 years. (Dalbar Inc.)
2. Letting Emotion Get in the Way
Despite the fact that the S&P 500 rose on average 11.1 percent each year over the last 30 years, the average mutual fund investor made only 3.8 percent. This is because people buy and sell on emotion. Warren Buffett, the famous American value investor and CEO of Berkshire Hathaway once wrote, “Investors should be fearful when others are greedy and greedy only when others are fearful.” When investors sell on fear, it will drive a stock price down. Likewise, when they buy on greed, it will drive a stock price up in the short term. Basing your decisions on reliable information, instead of emotion, will pay off in the long run.
In order to prevent yourself from trading on emotion, it’s also essential that you depend on a proven methodology that you trust. To quote another famous investor, quantitative analyst James O’Shaughnessy, “Models beat human forecasters because they reliably and consistently apply the same criteria time after time.” This is different from human beings who are swayed by emotions and opinions.
What I use to eliminate emotion is the Chaikin Power Gauge rating model, which rates a stock’s potential to out- or under-perform the market over the next three to six months. It’s like a GPS for stocks. Having a tool like this that does the research and analysis for you can prevent you from making emotionally-driven investing mistakes.
3. Ignoring Earnings Season
Publicly traded companies are required to release earnings reports four times a year. Stocks can be most volatile around these times; a surprisingly good earnings report can drive a stock price up, or vice versa if it’s a disappointment. Investors should pay close attention to these time periods and use them to their advantages for incredible profits not often possible during the rest of the year.
A few quick tips:
● Always be aware when stocks you own are reporting earnings.
● Consider using the few days ahead of earnings reporting as a possible buying opportunity.
● It can be a bad sign when a stock misses earnings expectations over and over again.
4. Not Selling at the Right Time
Don’t forget that the only way to lock in your profit on a stock is to sell. It’s important to know when to sell, which can be one of the most difficult aspects of investing. An investor’s fear of losing is roughly twice as extreme as the satisfaction of earning that same amount of money. This is known as “loss aversion.” The behavior results in investors consistently selling winning investments too early, while holding onto losing investments in the hopes that they will come back. To avoid this mistake, I use the Chaikin Power Gauge rating to alert me when my stocks turn neutral or bearish, so I know to sell before the prices drop. You should also establish an exit strategy (for example, setting a stop-loss price), which can help you exit a position before taking a big loss.
Simply taking the time to understand and avoid making these common mistakes will help investors dramatically improve their portfolio results.
Sandy Chaikin is a member of the DailyWorth Connect program. Read more about the program here.