These common misconceptions about investing can lead you astray. Here's why you should do the opposite.
Sometimes the best way to succeed is simply to avoid doing the things that lead to failure. That’s the approach of legendary investor Charlie Munger, who counsels “Invert, always invert.” In other words, find the ways you might screw up your investment portfolio — and then never do them.
With that in mind, here are three ways you can ruin your portfolio. Run in the opposite direction.
1. Trade in and out of the market
“Don’t just stand there, do something.” That’s the mantra that many investors think they should follow to profit in the stock market. Lots of conditioning from Hollywood films and the financial media have led individual investors to the erroneous belief that they have to watch the market all the time and time their buys and sells to make a good return.
A great way to screw up your portfolio is trying to time the market. Trying to “top tick” a stock — that is, attempting to sell it at a high — means you may miss out on the long ramp of a great stock, such as the years-long run-up of Amazon. In fact, research has shown that one of the biggest predictors of investing success is “time in market”: Investors were more successful if they simply held their stocks and didn’t trade in and out of the market.
So if you want to screw up your portfolio, be a highly active trader. However, if you want a better shot at success, change your mantra to “Don’t just do something, stand there.”
2. Buy because a sector is 'hot'
The news loves to declare something “the next hot thing.” One year it’s 3-D printers, the next year it’s self-driving cars. In 2017 it was bitcoin. The media’s fascination is fickle. But buying a company because your neighbor is talking about it — unless your neighbor is investing legend Warren Buffett — is a great way to screw up your portfolio.
Jumping on the bandwagon fuels many great investing bubbles, including the dot-com boom and bitcoin mania. Once a trend hits the media, it’s often peaking in popularity. You're unlikely to make a lot of money jumping into a sector that everyone's already chasing.
Plus, what do you know about the company or industry? Great investors start with a thorough understanding of what they’re investing in. They don’t view an investment as a lottery ticket and cross their fingers that it works out. If you’re buying a sector because it’s hot and know nothing else about it, your portfolio may get hurt.
» READ: 5 awful reasons to buy a stock
3. Delay investing because you don’t have enough money
Again with the media. What is it with these guys giving everyone false impressions about investing? Would-be investors often believe that they must have a lot of money to begin, but that’s simply not true. Delaying investing hurts in at least a couple of ways:
The sooner you start investing, the sooner you learn how the market works. It takes time and experience to understand the market’s nuances and sometimes-irrational behavior. Much better to take your knocks when you have less money on the line.
More importantly, the longer you’re in the market, the more time you have to compound your gains. Again, “time in market” is one of the best predictors of future returns. Even a small snowball can grow into a huge one, if it has enough time to compound.
So get started, even if only with a small amount, and add as you can over time, ideally every month.
Of course, none of this matters if you don’t have an investment portfolio to begin with. If you don’t, the very first step to take is opening a brokerage account. Many brokers don’t have an account minimum — so there’s no reason to delay.