4 Common Investment Mistakes to Avoid

Our topic on this episode of the Ready for Retirement podcast is about the 4 common investment mistakes to avoid.

Questions to ask ourselves: How should my investments be allocated based on my different goals? What investment accounts are best for tax planning?  Which investment accounts are best as I head in to retirement?  Which investment accounts are best if I’m currently retired?How often should I be checking my account?  What should I do when the market is going down? 

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Key Points

• Mistake 1: Market Timing
  • Although it may be tempting when the market is doing well or when the market is doing poorly to time the market, doing so may impact your portfolio severely. 
  • Assume in 1970 you had invested $1,000 in the S&P 500. Today, that money would be worth $121,353.00.
    • If you missed the single day the S&P 500 had its best day in the market, you would have ~$109,000.
    • If you missed the five best days, you would have ~$77,000.
    • If you missed the fifteen best days, you would have ~$43,000.
    • If you missed the twenty-five best days, you would have ~$27,000.
  • The cost of trying to time the market can drastically decrease the growth of your portfolio.
  • The best days, historically, happen amidst incredible uncertainty. 
• Mistake 2: Misunderstanding Averages
  • Example: The S&P 500 index, going back to 1926, has averaged ~10% a year.
    • Of those 95 years, the S&P 500 has never returned 10% in any of them.
    • In only 6 of the last 95 years, the S&P 500 was within 2% of 10%.
    • In the last 95 years, the best return was +54% and the worst return was -43%.
    • Expect significantly higher or significantly lower returns when you invest in the S&P 500, but year over year, you can’t predict what that return will be. 
  • The longer you remain invested, the higher your chances, historically, of increasing your average return.
• Mistake 3: Investors Chasing “Hot” Stocks
  • Example: Tesla (TSLA) market capitalization is ~$750 billion.
    • After a company becomes successful and joins the top ten companies in the world, its performance tends to change drastically from when the company was rising to what it became today. 
    • Five years after a stock joins the top ten companies in the world, it tends to underperform the market as a whole by 1%.
    • Ten years after a stock joins the top ten companies in the world, it tends to underperform the market by 1.5%.
    • Historically, once a company has done extremely well, investors buy and the outperformance of that stock does not exceed the market and continue its past return. 
• Mistake 4: Focusing on Recent Poor Performance
  • Investors assume poor performance will continue once it begins.
  • Here’s an example to show why this isn’t the case:
    • In the past 95 years, how has the market performed after a 20% decline (bear market)?
    • If you were to look at the returns after a stock market has declined 20%, the following year specifically, the market has averaged 18.6%.
    • If you were to look at the three-year cumulative return, the market is up 35.6%.
    • If you were to look at the five-year cumulative return, the market is up ~72%.
  • As investors, we often don’t want to invest when the market is down, when in reality, that is one of the best times to invest.
•  Overview
  • Mistake 1: Market Timing
  • Mistake 2: Misunderstanding Averages
  • Mistake 3: Investors Chasing “Hot” Stocks
  • Mistake 4: Focusing on Recent Poor Performance

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