Since 2012 we have had approximately 80 new highs on the S&P 500. It's been record-setting for stocks, but what’s truly interesting is the fact that we have achieved these highs without any one industry carrying most of the weight. In the early 2000s we saw the tech industry bubble pop, and banks followed a similar pattern in 2007. Now, the markets are continuing to grow as a rising tide lifts pretty much all sectors of the market. This has made life easy for investors who own diversified baskets of equities, but tough for the traditional stock picker.
With the market continuing its upswing, and new investors jumping in, I think now is a good time to review a few bad habits investors should avoid. I have been helping people invest for many years now, and what’s interesting is that I see very different people falling into the very same bad habits time and again. Let’s look at the bad habits you should avoid when investing on your own:
Bad Habit 1 – Herd Mentality
Your mother probably asked you as a teenager, “If all your friends were jumping off a bridge, would you jump too?” The herd mentality is something that can be seen in many different areas of life, including the investing world. People hear that a particular stock is skyrocketing from friends or the media and they want to jump on the bandwagon. That is typically a bad investment strategy.
Ultimately, chasing the “hottest stock” will leave you running ragged and always disappointed. Instead, remember to diversify and balance your portfolio. We’ve seen instances of investment herd mentality play out throughout history, notably Holland’s tulip bubble in the seventeenth-century and the home buying bubble in the mid-2000s. They don’t end well for the herd...so don’t buy into the hype and jump off the bridge.
Bad Habit 2 – Benchmarking
Whether it’s large-cap, small-cap, the energy market, European markets, Asian markets, or bonds, there are a lot of different asset classes shuffling around for the top performance throughout the year. Comparing the performance of your portfolio against the best performing market of the year can be exhausting and leads, again, to constant disappointment. Don’t race to the brightest green lawn on the market spectrum each year, instead focus on making sound investments that are balanced and diversified.
Bad Habit 3 – Relying On Past Performance
When investing in individual stocks or mutual funds, it’s more important to understand why an investment had its past performance rather than just the numbers of the performance. I think the best thing you can do when investing in a company or fund is to try to understand what their prospects are for the next five years.
It’s easy to look at a chart of stock performance and say, “well, this company did well last year, so they must be a safe bet for this next year.” A company might have a particularly good year and see their share price rise, but that doesn’t guarantee them a good year after that. Even if a stock has averaged a good return for several years, it’s important to be sure the company is positioned to continue that growth. Some businesses are better positioned that others to deliver sustainable growth over time.
Bad Habit 4 – Anchoring
While most of my advice generally harps on not changing your investments in an overly frequent manner, anchoring actually addresses the other side of this spectrum. Anchoring is when you have an emotional attachment to a particular investment. Perhaps your mom bought you some shares of a stock when you turned 13, and you aren’t willing to sell them because you’re so comfortable with that particular investment. When your investment strategy is based on emotion, you are not making sound investment decisions. It might feel like that particular stock is safe because you’ve owned it so long, but let’s remember the fate of stocks like Wachovia, Lehman Brothers, Enron, and TEPCO.
Bad Habit 5 – Narrow Framing
When you feel you understand a company and they are doing well, it may make sense to invest. However, it is a bad habit to invest too much in one particular company. If you are investing 40, 50, or even 80 percent of your investments into one company because you feel confident in it, you are putting yourself in a dangerous position. While Coca-Cola, Home Depot, or Cisco are solid companies, even if you currently work for them or have in the past, it’s never a good to put all your (nest) eggs in one basket.
When it comes to investing, you have to be careful to keep your “greed and fear” in check. It’s easy to get caught up in a hunt for the best stock or to get scared into “going to cash”, but the best way to grow your money over time is the tried and true system of balance, diversification, and patience.
Wes Moss, the Chief Investment Strategist for Wela, writes a weekly blog for AJC.com. You can find his original article here.