The 8 Most Dangerous Investing Mistakes

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Stocks have been on a tear since Donald Trump’s election. And the bull market celebrates its eighth birthday this week. But even in a market that goes almost straight up, it’s important to avoid pitfalls. Here are some mistakes I’ve watched investors make repeatedly. Alas, I’ve made a few of them myself.

7 Biggest Mistakes Investors Make

1. Getting spooked by the bears

There are always solid reasons why the stock market should go down. Some of the smartest people I know are almost always bearish. But I think the investors who do best in the market tend to ignore many of the bearish indicators and, instead, stick to their long-term stock allocations. Over time, the market has gone up about two of every three years, on average — and that’s going back more than 100 years. You have to have a powerful reason to bet against those odds.

2. Ignoring fund volatility

In a bull market, taking extra risk generally pays off. But in bear markets, high volatility amplifies your pain. What’s more, academic studies have shown that risk-adjusted returns are more predictive of future returns than raw returns. You can find risk-adjusted fund returns at Morningstar.com. Just click on ‘Ratings and Risk,” and look at standard deviation — which measures the volatility of a fund’s monthly returns over three, five and 10 years — and Sharpe ratio, which measures the risk-adjusted returns over those same periods.

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Consider one of my mistakes. Bridgeway Aggressive Investors 1 (BRAGX) used to be one of my favorite funds. But in the 2007-2009 bear market, it tumbled 64.4%, compared with a 55.3% loss for Standard & Poor’s 500-stock index. The fund has done well again lately, returning an annualized 14.8% over the past five years, an average of 0.8 percentage point better than the S&P 500. But Bridgeway was 35% more volatile than the S&P over the past three years, and I would prefer not to risk outsized losses in the next downturn. (All prices and returns in this article are through March 8.)

3. Paying too much

I love Amazon.com (AMZN). I’ve practically ceased going to stores because it’s so much easier and less expensive to just click a few buttons. I read books on a Kindle and watch Amazon video. It’s not the stock’s price, $851, that scares me. It’s that the shares trade at 110 times the company’s estimated earnings for the coming 12 months. That’s more than six times the price-earnings ratio for the overall market. Yes, I know that the company is still growing like a weed and that the narrow profit margins on its main businesses should widen, eventually. But the shares already reflect a ton of good news. For the stock to continue higher, it will have to do even better than investors expect. I’m passing on Amazon at this price.

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Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for Kiplinger.com and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or sgoldberg@kiplinger.com.