Investors commonly make the following eight biggest mistakes with their long-term investment strategy: #1) Having unclear investment objectives, #2) Underestimating their time horizon, #3) Ignoring inflation, #4) Pivoting away from a long-term strategy, #5) Misjudging risk, #6) No foreign securities, #7) Over-reliance on widely known information, and #8) Forgetting the importance of supply and demand.
Successful investing requires more than just selecting the right stocks or bonds. It also requires avoiding big mistakes that can seriously hurt long-term portfolio growth potential. Fisher Investments created The Eight Biggest Mistakes Investors Make™ to help investors identify and avoid costly mistakes. Understanding these eight mistakes can greatly improve an investor’s ability to reach their long-term investing goals and objectives.
Below we explore each of The Eight Biggest Mistakes Investors Make™ in more detail.
Not Having Clear Investment Objectives or an Appropriate Time Horizon
People often invest without clear investment objectives or an appropriate time horizon, focusing instead on short-term returns and price swings. Investors who don’t have clearly defined investment goals over an appropriate investment time horizon are much more likely to have “knee-jerk” reactions to short-term market events. That means they have to rely on luck to achieve their goals rather than a portfolio strategy with a higher probability of success.
Underestimating the Time Horizon for Your Assets
Investors often underestimate how long their portfolio will need to provide for them. Given rapid advances in health care and nutrition, people are simply living longer today than decades ago, which means their money needs to last longer. Having an accurate sense of life expectancy can mean the difference between investing success and failure. One of the primary drivers of a successful portfolio strategy is the ability to accurately identify the investment time horizon, or the amount of time an investor’s assets need to be working.
Ignoring the Impact of Inflation on Your Portfolio
Investors all too often focus on the dollar value of their portfolios without considering their purchasing power. Over time, a portfolio’s purchasing power can diminish due to inflation. Since 1925, inflation has averaged about 3% per year,* though it does fluctuate over time. It can rise dramatically, as seen in the mid-1970s and early 1980s, or it can be relatively subdued, as it has been this past decade. If we assume prices continue their long-term trend and rise about 3% per year for the next 30 years, an investor who currently requires $50,000 to cover annual expenses will need approximately $67,000 in 10 years, $90,000 in 20 years and about $120,000 in 30 years just to maintain the same purchasing power**.
Turning Away From a Long-Term Investing Strategy After Suffering Losses
After a correction or bear market, some investors may be tempted to abandon stocks once they “get back to even.” Such emotional decisions can be harmful because they remove the focus from achieving their investing goals. In times like these, it’s especially important that investors stay focused on their long-term strategies. Prudent investors know stock markets can sometimes be bumpy and unsettling. However, historically, that volatility has come with a benefit—stronger long-term returns relative to bonds. Since 1926, the stock market has returned about 10% a year on average.*** This includes both bull markets AND bear markets. Though remaining calm during volatility can be challenging, capturing market moves above previous highs is essential to achieving long-term stock market gains.
Improperly Judging Risk
Many investors improperly judge risk. Generally, the longer the time horizon of your investments, the more risk that may be appropriate, depending on your cash-flow needs and return objectives. Increased risk can allow for increased returns over the long term. But overly conservative portfolios can underperform.
Avoiding Foreign Securities
Most investors know it’s smart to diversify, yet most American investors aren’t nearly as diversified as they think. A portfolio with only US stocks misses out on an important factor—the rest of the global stock market. American investors tend to focus on US stocks. However, investing only in US stocks may cause investors to miss out when foreign stocks outperform US stocks, a particular challenge for investors who rely only mutual funds.
Making Investments Based Only on Widely Known Information
Many investors regularly read various newspapers, magazines and newsletters. Unfortunately, countless hours spent researching may not help you beat the market. Why? Because capital markets efficiently price in all widely known information. As soon as news is available to the public, it becomes reflected in share prices. So looking at the same thing as everyone else doesn’t give investors a leg-up on other investors. Despite this fact, many investors still make trading decisions based upon widely known information. That’s not to say news should be ignored. Rather, in order to beat the market over time, we believe investors must either know something most others don’t or interpret widely known information differently and correctly. This unique knowledge and insight can enable you to take advantage of things others miss.
Forgetting the Importance of Supply and Demand
Pundits, economists, analysts and journalists all have theories on what factors will move stocks. But often the most fundamental factors determining stock prices go unnoticed: supply and demand. Basic economic theory states supply and demand for any asset traded in a free market will determine prices. Though this fundamental can be easy to overlook, it’s vital for understanding stock movements. Consider the bull market in the late 1990s. At that time, demand surged as investors clamored to purchase stocks. Initially, stock supply remained relatively steady, and stock prices rose. But in late 1999 and early 2000, a huge influx of stocks came to market through initial public offerings (IPOs). The new supply overwhelmed demand, stock prices fell and a bear market ensued. After the bear market, the supply trend reversed as a high rate of cash mergers and acquisitions reduced stock supply and boosted prices.
Avoiding these eight biggest mistakes takes discipline and time. Even the most savvy investors find it difficult to avoid all investing pitfalls. Many investors simply don’t have time to process the vast amount of information available today and apply it to their individual, sometimes complex, investment needs.
Fisher Investments has been helping investors avoid these eight mistakes for over 30 years. We take time to educate you regarding our investment decisions through proactive contact from a dedicated professionals and ongoing education.
To get the benefit of Fisher Investments’ expertise or to learn more about how we can help you avoid The Eight Biggest Mistakes Investors Make™, call us at (888) 823-9566.
*Source: Factset as of 01/28/2015. Based on US BLS Consumer Price Index from 1925-2014
**Estimate based on a 2.98% rate of inflation.
***Source: Global Financial Data, as of 01/23/2015. Based on 9.99% annualized S&P 500 Index total returns from 1926-2014.