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We talk with a lot of investors and mistakes are one of their biggest concerns. One investor told us that in 2008, as the stock market plummeted and large financial firms filed for bankruptcy, she stopped investing her monthly contributions to her retirement account. She had decades before she hoped to retire, and she knew that stocks had historically done well over the long term. But like many investors, she was afraid, and she believed that leaving her contributions in cash would help protect the rest of her portfolio from further losses.
Today, she looks back at that decision as a mistake. By the time she started to invest her retirement contributions again, the market’s recovery was well under way, and she’d missed out on substantial gains. And now that she’s worked through how much she likely needs to accumulate for retirement, she realizes that she needs to be invested in stocks – and stay invested in stocks long term.
We all make investing mistakes. They are part of long-term investing, just like they’re part of life. But we can’t let mistakes hold us back from doing the work needed to achieve our long-term goals. Fortunately, there are often ways that we can get back on track. The investor who had stopped investing her retirement contributions, for example, decided to sign up for an automatic investment plan (AIP) so now her monthly contributions are automatically invested in the funds she’s chosen to own – whether the market is going up or down.
Mistake #1 – Cycling in and out of the market
Some investors try to take advantage of up markets and avoid market downturns, but they often end up buying and selling at inopportune times. They tend to sell in down markets and get invested again after the market’s recovered – effectively buying high and selling low.
Breaking the cycle of going all-in and all-out of the market is the first step to successful long-term investing, and one simple way to do this is to invest in both stock and bond funds. Investors who hold stock funds for potential growth and bond funds for stability may be better able to weather both up and down markets.
Mistake #2 – Avoiding risk rather than managing it
Some investors are so focused on avoiding short-term losses that they risk missing out on long-term gains. We’ve talked with investors who have been in cash for years because they felt the stock market was due for a correction and the bond market would be negatively affected by rising interest rates.
We believe it’s better to try to mitigate risk than avoid it altogether, and there are many effective ways to do so. Investing in a balanced portfolio of both stock and bond funds can help mitigate stock market risk. Investors can also limit their exposure to riskier areas of the stock and bond markets. That’s what we do in the Upgrader Funds: we cap exposure to riskier funds and use them as part of a well-constructed portfolio.
Mistake #3 – Overlooking diversification
Diversification can help mitigate risk, but many investors aren’t broadly diversified. The Investment Company Institute’s 2015 Fact Book found that many fund investors own just four funds. But if one of these funds starts to decline, it could have a major impact on these investors’ portfolios.
We believe that most investors need to own more than four funds in order to be adequately diversified across stock and bond markets. Each Upgrader Fund invests in at least a dozen other funds and ETFs, which gives investors the ability to own a full fund portfolio in one fund purchase.
Mistake #4 – Reacting emotionally to changing markets
How we respond to changing markets matters. Some investors often react emotionally to these changes, and this rarely leads to smart investment decisions. In up markets, investors may feel overly confident and end up taking on more risk. And in down markets, fear takes over and investors may end up selling.
It can be challenging for investors to control their emotions, but a disciplined investment strategy may be able to help them make choices that are in line with their long-term goals. The Upgrading strategy we use to manage the Upgrader Funds leads us to change our portfolios based on recent fund performance, not our emotions or our ideas about where the market may be headed.
Mistake #5 – Relying on market predictions
Most people want to believe that someone knows what’s going to happen in the market, and there are many experts who are happy to share their predictions. But market changes are often different than anyone expects, and investors who cling to forecasts may be led astray.
An active strategy can help investors respond to changing markets without the need to predict these changes in advance. Our Upgrading strategy prompts us to take action based on how a fund is performing compared to other funds with similar risk, not forecasts.
Diversification does not assure a profit or protect against loss in a declining market.