The 5 Mistakes Every Investor Makes and How to Avoid Them, 2nd Edition

MISTAKE #1Market Timing

Boy, do I have an investment for you! It has earned about 10 percent per year over the last 88 years and has gone straight up. Check it out (see Figure 1.1)!

Now, what if I told you that return was real? More intriguing is that it is readily available to you. It's just waiting for you to participate. What is this incredible, magical investment? Well, it's something you may have heard of: the stock market.

If you are like most Americans, this sort of return seems like a dream. Numerous studies attempt to quantify the returns realized by individual investors relative to the market as a whole, and their conclusions are the same: Investors' stock portfolio returns regularly lag behind the stock market return and typically by a very wide margin. Market timing is the idea that there are times to be in the market and times to be out of it. Some people attempt to “protect” their money by exiting the market when they sense a downturn coming or load up on high-risk stocks when they anticipate a recovery.

FIGURE 1.1

Source: Data from S&P Dow Jones Indices, LLC 2014.

Let's get one thing straight right out of the box. Market timing doesn't work. It just doesn't. And don't tell me you don't market time either. Have you ever said or thought anything like this:

“I have cash on the sidelines, and I am just waiting for things to settle down.”

“I have a bonus, but ...