The 8 Most Dangerous Investing Mistakes
Time to learn from my misfortunes. Avoiding these missteps could save you a bundle.
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.
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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Stock Market Today: Dow Climbs 288 Points After Amazon, Intel Earnings
Post-earnings strength from Amazon and Intel helped cushion the blow of a disappointing October jobs report.
By David Dittman Published
-
Nvidia Stock Is Joining the Dow. Is It Time to Buy?
Nvidia will replace Intel in the Dow Jones Industrial Average this Friday. What does it mean for the stock?
By Dan Burrows Published
-
6 Best Books on Investing
investing These six books will help you be a better investor.
By Coryanne Hicks Last updated
-
Bond Basics: Zero-Coupon Bonds
investing These investments are attractive only to a select few. Find out if they're right for you.
By Donna LeValley Published
-
Bond Basics: How to Reduce the Risks
investing Bonds have risks you won't find in other types of investments. Find out how to spot risky bonds and how to avoid them.
By the editors of Kiplinger's Personal Finance Published
-
What's the Difference Between a Bond's Price and Value?
bonds Bonds are complex. Learning about how to trade them is as important as why to trade them.
By Donna LeValley Last updated
-
Bond Basics: U.S. Agency Bonds
investing These investments are close enough to government bonds in terms of safety, but make sure you're aware of the risks.
By Donna LeValley Published
-
Bond Ratings and What They Mean
investing Bond ratings assess the creditworthiness of your bond issuer, can help limit your risk of default and maximize yield.
By Donna LeValley Last updated
-
Bond Basics: U.S. Savings Bonds
investing U.S. savings bonds are a tax-advantaged way to save for higher education.
By Donna LeValley Published
-
Bond Basics: Treasuries
investing Understand the different types of U.S. treasuries and how they work.
By Donna LeValley Published