Potentially Make Money Despite Your Investing Mistakes
by Alexander Green, Investment U's Chief Investment Strategist
Monday, May 23, 2011: Issue #1518
Investment mistakes can be expensive and some times fatal to your financial health.
Yet you will make them. And that's okay.
The key is to:
- Not make the terribly stupid ones,
- And to learn from the rest.
Here's what I mean ...
Bone-Headed, Life-Altering Investment Mistakes
Those who make bone-headed, life-altering investment mistakes - the kind that destroy retirement dreams or radically change standards of living - almost always make the same ones:
- They didn't invest in quality.
- They didn't diversify.
- They repeatedly tried - and failed - to time the market.
- They delegated their investment decisions to someone unworthy of the task.
There's a simple way to avoid these pitfalls...
Divide and Conquer Through Asset Allocation
Divide your investment portfolio among different asset classes (stocks, bonds, precious metals, inflation-adjusted Treasuries and so on) using our Oxford Asset Allocation Model, re-balance annually and follow proven, battle-tested rules of investment (which obviates the need for a full-service broker).
When you buy individual stocks, there are further mistakes you can - and will - make. Sometimes your timing will be wrong. Occasionally, you'll be hit with a bolt out of the blue, like:
- A surprise earnings miss,
- A product recall,
- A patent infringement,
- Or an unexpected class-action suit.
Performing your due diligence - thoroughly investigating each business before you invest in it - can mitigate these risks. But that can't eliminate them. There are too many potential risk factors for even the most diligent investigator to uncover.
Lessen the Sting of Investment Missteps with Trailing Stops
What do you do? First, you understand that you'll be wrong occasionally - and take steps to lessen the sting of these missteps.
A good example is our trailing stop policy. They give you unlimited upside potential and strictly limit your downside risk.
- Longer-term investors might use a 25 percent trailing stop.
- Short-term traders will run their stops closer, say 15 percent behind a stock.
The important thing is to follow a proven discipline. That protects your hard-won gains and keeps the inevitable mistakes from derailing your investment plans.
I mention these timeless notions because I see a lot of investors making fundamental errors today.
- They're loading up on gold and silver at the expense of almost everything else.
- Or sitting with most of their money in cash, earning next to nothing.
- Or they're buying extraordinarily risky bonds to earn higher yields.
Successful investors hedge their bets. They understand that they'll get hit from time to time, just as NFL players get slammed to the ground. It's all part of the game. Expect it. Prepare for it.
What If You're Wrong?
No matter what your investment posture, take a minute to ask yourself, "What if I'm wrong? What do I stand to make if I'm right? What do I stand to lose if I'm wrong?"
Mull it over. Visualize your best-case and worst-case scenarios. Focus on where your investment portfolio might be overexposed or out of whack - and adjust accordingly.
As someone who has been active in financial markets for more than 25 years, I have a finely honed sense of all the potential things that can go wrong - and a good appreciation, too, that there's plenty more we can't even envision.
As long as I'm an active investor, I know I'll keep making mistakes. But I'm done making the foolish ones. The older you get, the tougher it is to imagine starting over. My advice is this: If you're going to learn the hard way, start small and do it early.
Better still, learn from someone else's mistakes. As I tell my regular readers, "I've made all the dumb mistakes so you don't have to."
Heed the words of Benjamin Franklin. "Experience is a dear school, but fools will learn in no other."