Ineffective Investing

Mon March 13th 2017

How to be the least effective investor

So you've got a wad of cash and you want to play the markets? Good luck with that. Investing is a tricky, sometimes illogical game, with plenty of ways for you to trip up and see your money disappear go down. Less is more, up is down, and common sense isn't a big factor in successful investing.

Still ready to play? Here are some ways to lose money:

You know that crowdfunding means safety

All your mates are putting money in, so it's a sure thing, right? Wrong. With everyone buying into an asset, the price goes up, and people get ready to party. That's the time to sell, not buy.

Or just the opposite – all your friends are selling out of an asset, and the price has dropped to rock-bottom. It won't feel good, going against your friends, but that's when you buy up their assets and clean up. Unless the asset really is a dog – then you lose.

Returns are good right now – and that won't change

The state of the market right now is not a reliable prediction of the future. In fact, markets are notoriously unreliable, and if you can't be bothered studying the complicated information as an investor should, all you're left with are simplistic generalizations.

Add that to your belief in the safety of crowdfunding, and you'll find yourself buying high and then selling when prices drop. Goodbye cash.

The best time to buy is during economic growth

Sometimes this is true. But the cyclical nature of the stock market means that in extreme times – like the Global Financial Crisis (GFC) – just the opposite can be true. It's all about upside-down logic. With economic growth comes rising costs, inflation and interest rates – which make fund managers start to sweat. Share markets peaked in 2007, growth was excellent – then 2008 happened.

On the other hand, in 2009 stocks were half their previous price, profits were falling, people were out of work, all was doom and gloom – and the share market began to recover strongly. When things are bad, they're good.

Experts know what they're talking about

Would you consult a psychic with a crystal ball about the future of your investments? You might as well. As a group, financial forecasters are not known to be particularly accurate. Be especially sceptical of grand claims like 'permanent prosperity' or 'the worst crash in global history'. Where were the doomsayers before the GFC? Mostly in the prosperity camp.

It's like forecasting the weather, only not as accurate. You still need to look outside and see what the day is like, and financial predictions are the same. It used to be said "If you don't like the weather, wait a few minutes." Replace 'weather' with 'share market' and you've got the idea.

But experts have their uses. They can provide current information and put things in context so at least you have a better understanding of the way markets work.

Let your strong opinions drive your investment choices

You might be very sure about some things. Peak oil, rising debt, an aging population, the future of Europe – all these could be issues that affect the share market, but in what way?

Successful investing is not about being right. Don't let your favorite issues get in the way. Everyone likes to be right, but very few 'right' people make money. You might end up being right and very poor.

Keep a close eye on your investments

Here's another instance when common sense goes by the wayside. You're supposed to understand the market and keep an eye on it, of course you are. But the market changes day by day, hour by hour and even minute by minute sometimes. It's just too much information to process, too much racket to be able to think clearly.

With all the info 'noise' going on, two things can happen. You can either come to a standstill like a possum in the headlights, or you can turn and run to a safe investment haven. Either way, you make less money.

It's better to be patient, block the noise and take the long view.

Complicated investments are the best

Well, no. Too much complication and you lose focus – just like too much information, you spend all your energy micromanaging single aspects of your portfolio and lose sight of the bigger picture.

Go for complexity and you're in danger of putting your entire portfolio at risk. You end up with investments you can't get your head around, and you're liable to suffer share market burn-out.

Keep it simple. Avoid clutter and let the details go. Above all, don't invest in things you don't understand.

Be conservative when you're young

No-one ever got rich putting their money in a bank savings account – the higher return ventures are always more risky. Even though recent market events – notably the GFC – have made millennials more wary of higher-risk investing, if you're in this cohort, you should be thinking about investments that will be building wealth for your retirement. Because you have decades of your working life ahead of you, any losses you make can be easily recovered.

Timing the market is the way to go

Remember the crystal ball? Buying on a high with your mates and selling in a panic? Timing the market – buying low and selling high – is very difficult to do, even for the experts. You can try and avoid the bad days, but it often means you miss out on the good ones too, and then you really lose.

In fact, studies show that investment for the long term – putting your money in and leaving it there – gives a much higher and steadier return than trying to avoid the bad days and getting it wrong occasionally.

Even with the highs and lows of the share market and the global economy, a long term investment plan is still the most reliable and profitable way to manage your money.

Confused about investing or concerned about your financial goals? Contact us today for a second opinion on your investments or to discuss your financial plans and help you get the life you want sooner.