When it comes to investing in the stock market, losing money can be an easy task.
Here are five guaranteed ways to screw up your portfolio, cause stress, and most importantly, not make any money. Avoid these and you are on your way to some quality long-term returns:
1) Continually trade in your portfolio every chance you get. Timing the market is very difficult. Unless you are a very experienced and / or very good day trader, this strategy often does not work. One of the problems, even if you make money, is that you are continually paying trading fees every time you pull the trigger on the trade. Even a trade at $9.95 is actually double, since you have to sell a stock and then buy a stock. Just like in the sporting world the saying goes, “Sometimes the best trade is the one you never make at all.”
2) Use investing advice in any popular magazine that showcases â€œhotâ€ stocks. Once the magazine (which means the public) finds out about a really hot stock, the party is over. Magazines enjoy telling investors about great stock runs to the present, but are notoriously horrid at predicting the future.
3) Put your entire portfolio in money market, bonds and/or cash. I have more than one friend who is terrified of the stock market, frightened by real estate and one guy whoâ€™s even scared of most mutual funds! I imagine he sits around all day in his house, guarding his cash-stuffed mattress with a shotgun. He has most (if not all) of his money sitting in a money market account, getting 3 or 4 per cent interest per year. Some of it just sits in cash, earning less than 1 per cent! While itâ€™s prudent to have cash on hand, itâ€™s just a sitting place for your funds while in-between investments (even if it sits there for a whole year, waiting for that perfect bargain). Money market is not a great investment vehicle, because chances are that you will not even beat inflation over the course of your life with a money market account.
4) Go to a full-service broker. Maybe back in the 1960s this was a viable option, before the internet, ETFs, tons of investing blogs, magazines, newspapers and television shows all dedicated to investing. Thereâ€™s no excuse to not take charge and cut out the full-service broker, who charges a substantial fee to look after your money. Donâ€™t know anything about investing? Donâ€™t like high-risk stocks? Donâ€™t know where the market is headed? Buy a few balanced mutual funds (or diversified ETFs) and leave them alone.
5) Time The Market. All I can say is â€œgood luckâ€. People continually try to time the market. It can be done, but none of the big investors who have made a fortune in the stock market advocate timing the market to any great extent. Besides, why lay awake at night worrying about it? Just carry a diversified portfolio (including cash) and then buy on the dips. Take advantage of a bear market by loading up. Unload a little bit and take some profits when things are going really well. Thereâ€™s nothing worse and going for the home run, taking a big swing, and then missing the pitch and falling down at the plate.