It isn’t always easy being a successful investor. Especially in times of market volatility, when every investment professional or stock picking specialist has a million ideas for you to follow. More often than not, good investing is as much about avoiding doing the wrong things as it is about doing the right things.
Some of things one should do include: spend less than you earn; focus on getting your investments to pay you back (dividend paying stocks are a good example); don’t put all your eggs in one basket (diversify your investments), and; remain focused on the long term.
That said, there are a lot of ways that investors become side tracked from these key principles, and their strategy become derailed due to very common mistakes that so many investors make. Below, we focus on the most common of these mistakes that investors tend to make, which makes it difficult for them to generate a decent return.
First mistake is to consider yourself a trader, not an investor. An investor has patience, and sometimes it will take a while to see a trading strategy work itself out. A trader looks at the very short term to determine his or her success – a day or maybe a week. If the trade doesn’t work out, they will exit the position. An investor has patience – they bought the position because they understand and believe in the stock because of its business position, management team and new technology. Here, the investor behaves like an owner of the business, and is focused on the long term, often letting rising profits and dividends drive the stock price higher over time.
No one knows when the market will run higher or fall lower – as an individual investor, you cannot time the market. Most individual investors wait too long, either waiting until the market has shown a clear sign that the trend is bullish before buying, or until the trend is bearish before selling. Each time, investors will be late, and have missed a portion of the gains or held onto to losses. More often than not, having a balanced portfolio of stocks and bonds relative to your age and risk tolerance is a better strategy – it will play out with respect to your financial needs rather than with what you hope the market will do.
Be aware of expenses. Mutual funds have expenses, as do stocks and Exchange Traded Funds. Keeping aware of these will help with understanding your investment returns. As an example, assume that the mutual fund you purchase returns 8.0% before fees. If the fee is 2.5%, the actual return to the investor is 5.5%. If that return was realized over 20 years on average, an investment of $100,000 would grow to $291,775. If the fee was 0.5% lower, that same $100,000 at a 6.0% return annually over the same 20 years would grow to $424,785 – a sizable difference. Focusing on mutual funds with a good history of returns and lower expense ratios may be a winning combination. However, overly focusing on fees may cause one to miss out on exceptional returns – there are funds who have an excellent track record, through good times and bad, of delivering above average returns, but carry a higher expense ratio than others.
Focusing on dividend yield is a good thing – but too much yield may indicate trouble. The stocks with the highest dividend yield are not always the best investment, and often a “too good to be true” dividend yield is exactly that – too good to be true. An exceptionally high dividend yield can indicate that a stock is in trouble, where the price of the stock has fallen to the point where the market expects a dramatic dividend cut or even worse. This has occurred in the past many times and shouldn’t be ignored. That said, there are hybrid stock-fund structures that specifically focus on dividends, and through selling covered call options or using leverage, offer attractive dividend yields without necessarily indicating a distressed situation. Buying stocks because of a good dividend is a sound strategy, the focus should be on the reasons for high dividend yields. If you understand that, then the investment decision can be sound.
Finally, as always, have an investment strategy. If you cannot put one together for your own personal investment goals, find a good investment advisor that can help you narrow down your financial needs and goals, and then define an investment strategy that would best work towards achieving this for you. At UCU we have investment advisors that can help you structure a strategy that best suits your investment needs.
Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
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