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Three common investment mistakes and how to avoid them

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Three common investment mistakes and how to avoid them

Avoid “emotional” investing, and diversify.

It's all too easy to make the wrong moves when it comes to investing, but avoiding three common mistakes can improve investors' chances of having more favorable outcomes, according to investment advisor SJS Investment Services.

With all the financial information available, it seems as if anyone could invest on their own and keep pace with the market. However, 30 years of data show individual investors' portfolio performance trails overall market performance. The 2015 edition of the "Quantitative Analysis of Investor Behavior" performed by DALBAR, a financial services research firm, showed in 2014 that the S&P 500 was up about 13.7%, while the average do-it-yourself equity mutual fund investor earned an average 5.5% return. Over the 30 years ending December 2014, the S&P 500 gained 11% annually; the do-it-yourselfer earned less than 4%. 

"It is about science, not the hype of believing you can 'beat' the market."

The firm explained the earnings disparity using roughly two decades' worth of listening to clients and their investing woes. "People aren't all that different when it comes to investing on their own. They are emotional," said Scott Savage, founder and CEO of SJS Investment Services. "They buy when the market is high, sell when it's low. Then they repeat until they are out of money." This behavior is the result of three common mistakes:

  • Timing the Market
    People think attempting to get in when the market is low and get out when the market is high is the best way to improve performance. "Not so," says Savage, who calls this a "fool's errand and a costly decision."
  • Stock Picking
    People often try to roll the dice and pick one, two, or a handful of stocks that they think are going to outperform the market. The firm recommends designing a portfolio diversified across and within asset classes as a way to minimize risk and capture the market's upside potential.
  • Chasing Performance
    People often choose an investment based on past or current performance with the assumption that it will continue. In the study, "Luck vs. Skill in the Cross Section of Mutual Fund Returns," published in the October 2010 issue of the Journal of Finance, authors Eugene Fama and Kenneth French showed that active fund managers cannot accurately speculate on where individual prices are going to go and systematically beat the market.

"It is about science, not the hype of believing you can 'beat' the market," said Kevin Kelly, SJS Investment Services president.

 

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