Learning from Investment Mistakes

Unless you are very rare, we all make mistakes. The important thing is that we learn from them. And I thought you might enjoy reading about lessons from some of the most common investment mistakes:

Avoid get-rich-quick schemes. Nowhere is the maxim, “There’s no such thing as a free lunch” more true than in the market. To stretch that metaphor further, I’d add that there’s no drive-through lunch option in the market. Yes, you can profit from a well-chosen, diversified portfolio of stocks. And, yes, sometimes one stock with be a real home run in terms of returns. But it’s highly unlikely that any one stock, whether pitched to you by a friend, family member, or even a successful stock broker, will be your ticket to amassing wealth quickly. Simply, if an investment opportunity sounds too good to be true, it is. So, resist following “hot tips,” however tempting they may be.

Understand you cannot time the market. The “buy low and sell high” mantra has been drilled into investors’ minds. However, the terms “low” and “high” are relative, non-specific and impossible to define. We can’t identify low or high until after stocks have reached these points. As the economist Bernard Baruch advised, “Don’t try to buy at the bottom or sell at the top. It can’t be done, except by liars.” So, invest in a diversified portfolio of uncorrelated asset classes. If you rebalance annually, you will, by default, be buying low and selling high, at least over an annual basis.

There is no such thing as a “sure bet” in the market. You may be very knowledgeable about a company or industry. But, remember, the big Wall Street firms have highly experienced teams of experts to make investment decisions – and they don’t always bat 1,000. Plus, even the most successful long-term investments may suffer periods of under-performance. We all know about Warren Buffett’s success focusing on long-term performance, but even he has temporary setbacks. In December 2014, for example, Berkshire Hathaway’s big bets on Coke and IBM cost the firm 2.3 billion—over the course of a few weeks!

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