Mistake #1: You will try to time the market
The past 20 years of market ups and downs has taught us one very clear lesson: Sometimes investments go down. But it has led some of us to a truly dangerous conclusion — that we should try to predict the next collapse.
The market will decline again. That's as far as anyone can go with certainty. Yet retirement investors who decided at the start of 2013 to go to cash missed a huge climb in stocks. If history is any guide, they'll wait until the market is higher still and then go in big, likely just in time to buy the high.
Retirement investing is not about timing the market. Rather, it's about owning a disciplined portfolio that automatically takes gains when they appear and protects you from the downside in rocky times.
Mistake #2: You will speculate rather than invest
If you've been following the saga of bitcoin, the virtual currency, it has been a really interesting lesson in speculator hysteria. The cryptocurrency supposedly offers its holders shelter from the vicissitudes of printed fiat money, yet so far it's mostly been a roller coaster.
Dormant for many months, the price of the electronic money took off in November, going from below $200 to above $1,100 in short order. By the beginning of this year it had fallen in half, rebounded and now trades in the vicinity of $600.
Know what else demonstrates this kind of volatility? Technology stocks. Precious metals. Investors love the idea of a "silver bullet" investment that will solve all their financial problems. So they tend to glom onto a great short-term story and drive prices up. Sooner or later, reversion to the mean sets in.
You'd be much better served by owning the whole market in an index fund than in trying to figure out which stock or asset class will outperform. Even if you get it right today, there's no reason to believe you will stay right long enough to realize the gains. Yet you've amped up your risk tremendously in the meantime by doing so.
Mistake #3: You will trade
Oh, you will trade. You will watch cable TV shows on investing and subscribe to newsletters and talk with your friends about the ins and outs of IPOs in the news. You will know more about Mark Zuckerberg's latest plans for Facebook than you likely know about what's happening this weekend in your own hometown.
It's a fine hobby, but it isn't a retirement plan. Put some money in a side account and trade away, but keep your IRA and workplace 401(k) money far, far away from any kind of active trading.
Long experience in the markets and mountains of academic research have shown that investment success is greatly restricted by the costs of trading. One new study found that investors pay 1.44% a year on average just in trading costs .
The more a mutual fund trades, the worse its performance, the study concluded. The highest fifth of funds measured by trading activity trailed the least-trading fifth by 1.78 percentage points annually. That's a serious drag, and it doesn't even take into account the fees active funds charge for doing all this trading on your behalf.
Source: Mitch Tuchman, Market Watch
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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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