When the market is as turbulent as it has been lately, investors can easily panic and make mistakes. Our investment advice is to avoid three common mistakes we have seen over the years:
- Overanalyzing: During this week’s market turmoil, the media has been focusing on the uncertainty in Europe. The election of a socialist president in France and electoral confusion in Greece is fuelling further fears about the ongoing European debt crisis.
Turmoil is inevitably accompanied by a flood of economic statistics and analyses of government economic policies and how they may affect markets. You may feel tempted to try to figure out what the economy will do next, and invest accordingly. But economic forecasting is hard enough. When you try to forecast market trends based on economic forecasts, you are virtually certain to fail. As Peter Lynch (the world’s top mutual-fund manager from the 1970s through the early 1990s) wrote, if you spend 12 minutes a year worrying about the economy, you’ve wasted 10 minutes.
Investors should resist the urge to overanalyze and try to predict the future. If the situation continues to rapidly change, or if market turmoil increases, you could find yourself stuck with costly and unprofitable investments in your portfolio.
[ofie_ad]
- Refusing to make changes: The second easy mistake to make during times of market upheaval is to throw up your hands and refuse to consider changes in your portfolio. Although you can’t predict the market or economy with any consistency, you can definitely choose which stocks are best suited to your portfolio, regardless of how the market is performing.
You can also update your choices as new information becomes available. Even if we recommend all your stocks as buys in our investment newsletters, you still need to consider how appropriate your choices are for you as an individual and to your portfolio as a whole.
On the other hand, if your portfolio consists of too many stocks we see as “holds” or, worse, stocks that are merely “okay to hold,” you run the risk of suffering steep losses, especially during periods of market turbulence. - Taking on heavy risk: Many investors do this in hopes of quickly reversing the losses they experience during market downturns. It’s a natural temptation in troubled times.
You may have noticed a lot of ads for courses in online, short-term stock trading or foreign-exchange trading. The promoters are aiming their pitch at inexperienced investors who have suffered losses due to market volatility. These investors may be inclined to follow the example of desperate gamblers who bet their last few dollars on a handful of lottery tickets, or a long shot at the track or the casino. That’s a wasteful example to follow.
COMMENTS PLEASE: Have you made any moves during a market sell-off that you later regretted? Has this helped you act differently in other market crises? Let us know what you think in the comments section below. Click here.
