Top 5 mistakes new investors make (AVOID THESE!) - YouTube

Hi, it’s Mia! Mistakes are one of the best  ways to learn, but when you're dealing with the  

stock market, it's better to learn from other  people's mistakes than to make them yourself  

since mistakes can cost you hundreds or thousands  of dollars--even your entire life's savings. I was  

guilty of making these very same mistakes when  I first started investing. It took me years of  

investing, spending thousands of hours reading  books, blogs, and forums, and studying the works  

of Nobel laureates in the field of economics,  that I recognized these mistakes, changed them,  

and grew my portfolio exponentially. Here are  the five common mistakes made by investors so  

you can avoid them. Mistake #1: Panicking when  the market drops and selling off your stocks.  

According to Nobel Prize–winning economist, Harry  Markowitz, “The human tendency is to buy when the  

market is going up and to believe that it will  continue to rise, and to sell when the market  

is going down because you believe that it will  keep falling.” This is known as recency bias,  

where investors place greater emphasis on recent  events because they are freshest on their minds  

even though they are not relevant or reliable.  Selling when the market drops is a huge mistake.  

According to Vanguard, between 1980 and 2017, the  stock market had 11 corrections. A correction is  

defined as a period in which there is a decline of  10% or more. During this same time period, there  

were 8 bear markets, periods in which there was a  decline of 20% or more, so these huge fluctuations  

are not rare events. You will go through many of  them in your lifetime. While the overall trend  

of the stock market for the past 100+ years  has been up, on a day-to-day basis, even on  

a minute-to-minute basis, there will be a lot of  up and down movements. This is normal because 90%  

of the trades on Wall Street are made by  professional fund managers and they are reacting  

to news that affect the publicly traded companies  in varying ways all day long. If you are investing  

for a retirement at least 10 years from now,  these downturns should be ignored. While dramatic  

portfolio losses can be nerve-wrecking, you need  to remember to keep a long-term perspective.  

For example, investors who were spooked in  2008/2009 and got out at that time locked  

in their losses. The recovery after those years is  often described as the Nike swoosh since it took a  

dip and was followed by a rebound. A lot of wealth  was made in the years after the Great Recession.  

2008 was not an “outlier” year and it wasn’t the  worst year on record. It was a one in forty year  

event. During your lifetime, you will likely  experience a couple of these downturn events.  

Instead of panicking during these periods, the  best thing that you can do as an investor is to  

stop checking your portfolio and to turn off the  news. Mistake #2: Not having an investment plan.  

Investing is simple but not easy and the biggest  reason that it is not easy is because a lot of  

people don’t have a plan or if they do, they  don't have the discipline to stick to their plan.  

According to Benjamin Graham in The Intelligent  Investor, A Book of Practical Counsel, 1949, “The  

investor’s chief problem, and even his worst  enemy, is likely to be himself.” An investment  

plan tells you how to invest and how to make  decisions without letting emotions dictate those  

decisions. The stock market can be very volatile  and without a plan, you can be tempted to sell  

during a market downturn, which could devastate  your portfolio, or you can be tempted to buy  

stocks that don't align with your investment  goals because of the fear of missing out,  

or you switch strategies so often that you end up  at the wrong level of risk for your temperament.  

If you plan for these events in advance, you can  safely navigate through them and stay on course.  

An investment plan can be as simple or as  detailed as you like, but at a minimum,  

it should contain the following: your investing  goals, your time horizon, and most importantly,  

your asset allocation, which takes into account  your risk tolerance. Asset allocation is the mix  

of the different asset classes that you hold and  the percentage of your portfolio that will be  

allocated to those assets. The assets  should be uncorrelated investments to  

stocks (also known as equities), such as fixed  income, bonds, treasuries, REITs, real estate,  

etc., so if one asset class goes down, it  wouldn’t drag down your whole portfolio.  

Each asset class carries different levels of  risk in comparison to their potential returns.  

Bonds are considered safer and less volatile than  stocks, but they also offer much lower returns.  

Generally, investors with a longer time horizon  

have a higher risk tolerance because they have  more time to recover from any market downturns.  

Investors who are closer to retirement are  generally more risk-averse and conservative  

since they will be drawing on their portfolio  soon and will have less time to recover from  

any market downturns. If you were an aggressive  investor, your asset allocation would direct  

more funds towards stocks, or equities, than  the non-correlated investment. For example,  

if you were in your early twenties and saving  for retirement forty (40) years out, and you were  

really aggressive, your asset allocation could  be something like eighty percent (80%) stocks  

and twenty percent (20%) bonds, which means if  you had one thousand dollars ($1,000) to invest,  

you would put eight hundred dollars ($800) into  a stock fund and two hundred dollars ($200)  

into a bond fund. As you get closer to retirement,  the asset allocation would shift to hold less  

equities. It can be something like seventy percent  (70%) stocks, thirty percent (30%) bonds when  

you are ten years out from retirement,  and then to sixty percent (60%) stocks  

and forty percent (40%) bonds once you retire.  If you don’t know what your asset allocation is,  

a lot of stock brokerage companies offer online  questionnaires that you can take to figure out  

your ideal asset allocation based on your  investing goals, time horizon, experience  

with investing, and risk tolerance. I'll link  Vanguard's questionnaire in the description below.  

When you take these questionnaires, you  need to be completely honest with yourself.  

There is nothing worse than having the wrong  asset allocation because it can result in a  

lot of sleepless nights and doubts during a market  downturn, and may lead you to make decisions that  

can hurt your portfolio. If you want a template  for an investment plan, I'll put a link in the  

description where you can get a copy of the  editable file. Mistake #3 is trying to time the  

market. People who try to time the market rarely  ever get the timing right. To time the market,  

you have to buy at the perfect time when the stock  is at its low and sell when it’s at its high. The  

truth is that it is very difficult to time the  market, and today’s high may be tomorrow’s low. If  

we look at this chart from Vanguard, the y-axis  represents the returns in terms of percentage  

and the x-axis is a timeline of the trading days  between December 31, 1979 and January 31, 2018  

with 1979 being on the left and 2018 being on the  right. The bars in blue represent the best trading  

days and the bars in red represent the worst  trading days. As you can see, the best and worst  

trading days can happen very closely together, so  if you were to sell on one of the worst trading  

days and sat out of the market to wait for the  market to get better, you could have missed out  

on one of the best trading days when the market  rebounded. Instead of trying to time the market,  

the better approach is to make investing something  that you do consistently and automatically,  

where you invest a fixed amount of money at  regular intervals. This is known as dollar cost  

averaging. Remember this: Your time in the market  is more important than trying to time the market.  

You can be an investor who has the worst timing  and invest at the top of the market each year, but  

if you started earlier, you will end up with more  money for retirement than the person who may the  

luckiest investor and buys stock at their low each  year but started investing later. Mistake #4: Not  

being diversified enough. Diversification reduces  risk and can actually improve performance. Nobel  

Prize–winning economist Harry Markowitz, famously  called diversification “the only ‘free lunch’ in  

finance.” Investors need to diversify across  companies, asset classes, global markets, and  

in a volatile market, they also need to diversify  across time by using dollar cost averaging. To be  

diversified with individual stocks, you need to  hold stocks from at least 30 different companies.  

The risk with individual stocks is that a company  can go bankrupt and your investment is reduced to  

nothing. To offset this risk, you would have to  hold stocks from a diverse number of companies.  

Index funds greatly reduce this risk because they  track hundreds to thousands of companies. Index  

funds are described as self-cleansing because poor  performing companies will drop off and will have  

a smaller effect on the remaining portfolio of  companies, while companies with a better chance of  

success are added to replace that poor performing  company. The risk of the index fund falling to  

zero is almost non-existent. Here’s a story to  highlight the importance of being diversified.  

In 2001, Enron, the one time darling company  on Wall Street, went bankrupt because they  

were discovered to have fudge their accounting  numbers to hide millions of dollars in debt, and  

their audit company, Arthur Andersen, had known  about it but they were pressured to overlook these  

accounting discrepancies. There was a secretary  from Enron who was getting ready to retire right  

before the company was discovered to have these  phony accounting practices. While she had a  

modest secretary’s salary, her 401k, which was  invested exclusively in Enron stocks, was worth  

$3 million. When the company went under, she lost  not only her job, but her entire life's savings.  

She wasn’t the only one, unfortunately. Many  people who worked for Enron were on the same boat.  

The lesson here is to not put all your eggs  in one basket. Mistake #5 is checking your  

portfolio too often. Investors who check their  portfolio often are more likely to make short-term  

decisions like over-trading and chasing  returns due to recency bias or hindsight bias.  

A Barclay’s study found that “investors  who prevented themselves from over-trading  

through specific strategies were, on average, 12%  wealthier than those who did not use self-control  

mechanisms.” Investors who jump in and out of the  market may make a quick profit in the short-term,  

but in the long-run, studies have shown  that their returns actually underperform.  

You only need to check your portfolio once a year,  to make sure your asset allocation hasn’t changed  

and to re-balance if it has. If you enjoyed  this video, be sure to subscribe to this  

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