The Biggest Mistakes Investors Make — Part I
It happens every market correction. Well-intending investors who say they can tolerate 10-plus percent declines in market value do just the opposite of what they said they would (and should) do. They sell out their positions at their threshold of pain only to buy back into the market at a higher, more “comfortable” level. The problem is that while they alleviated short term pain, they have actually compounded their losses and dug themselves into a deeper hole. What do I mean by this?
Suppose Murray has a $100,000 portfolio that declines 10% in a tough market. Unable to stomach the volatility and the $10,000 loss, he instructs his advisor to get out of the market until things settle down. A few months pass and the markets start regaining ground. Encouraged, Murray decides to get back in at roughly the same level his accounts had peaked at a few quarterly statements ago. He now has $90,000 invested that will need to grow 11-plus percent to recoup the lost $10,000 ($10,000/$90,000 = 11.11%).
Thankfully, the markets have a stellar run and Murray gets back to $100,000 over the next year. Murray is feeling pretty good about himself. Not so bad, right? Wrong! Had Murray kept a long term perspective and stayed the course, he would now have over $111,000. The difference is what we call “opportunity cost.” In this case, Murray’s investor anxiety cost him $11,000.
In a more commonly played out scenario, Murray in the above example gets back into the market and the market declines another 8%. Frazzled and angry, Murray bails out again at the bottom. His $90,000 has turned into $82,800. He is now $17,200 in the hole and must earn a hefty 20.8% to get back to par! Had Murray worked his original plan from the beginning, he would only need to regain $8,000 (8.7%).
You can see how when repeated, this can easily become a vicious cycle of losses. By far, the Number 1 Biggest Mistake investors make is allowing emotions to govern their investment decisions. This is why many folks who invest do not actually profit from the stock market. King Solomon, the wisest and richest investor in history, offers this advice:
Cast your bread upon the water
And after many days it will return to you.
Divide your portion among seven or eight
Not knowing what disaster may come upon the land.
~ Ecclesiastes 11:1-2
The Lesson: Be willing to take on prudent risk to grow wealth and achieve your goals. You must, however, keep a healthy long-term perspective. Have a well-diversified long-term plan, monitor and adjust the plan as needed and have the discipline to stick to it. A Certified Kingdom Advisor can guide you in crafting a solid plan and making wise financial decisions. We would be honored to help you do just that! Please give us a call to schedule a complimentary first consultation (540) 312-2925.