10 Innocent Mistakes Many Investors Fall Prey to in the Stock Market

The most important thing to know is that the stock market has some glaring investing truths that you should not ignore. Understanding these truths will help you make pragmatic decisions when you are investing. Here, we will dig down into the truths about investing so that you can become more educated when investing your money.

Looking at the chart below gives you a sense that it could take one or close to five years to recover from a major crash in the S&P 500. That means you are losing out on one to five years of compounding your wealth. The key is to stop the bleeding when severe corrections occur. Looking at a recent event, the Dow Jones Industrial took nearly 5.5 years to recover from 2008.

Truth 1: Taking Significant Losses Will Cost You Years of Compounding

Have you been told not to worry about taking substantial losses because you have time to recover, or that the market will come back? No matter if you are in your 20’s or 40’s, taking significant losses can severely damage your future wealth accumulation. If you are near retirement or currently retired, this could be devastating. It is vital you understand these truths about investing. Unfortunately, not even the diversification myths that exist out there will help you when market corrections of this magnitude occur.

Now, this does not mean you are not going to have investment losses, because you will. However, losing 30%, 40%, or 50% in your investment accounts will do more damage than you think. For example, if you lose 30%, this means you need 43% to get back to even, losing 40% you will need 67%, and losing 50%, you will need 100% to get back to even.

Having a personalized risk management strategy to decrease your risk from bear market crashes is vital. I am not talking about attempting to time the market, but to have a plan that limits your downward exposure. Make sure you know how much downside risk your portfolio currently has and look to decrease risk from bear market type losses.

Conclusion: Develop a personalized risk management investment strategy based on your goals.

Truth 2: People’s Risk Tolerance Will Change and are Not Static

People’s tolerance towards risk does not remain the same all the time. Similarly, if your investments have not been doing well, it is quite understandable to worry. Rather than just dwelling on the fact that your investments have not performed well, the better approach would be to analyze the situation.

Before making any rash decisions, it is always a good idea to revisit your goals. Have things changed, or are you merely getting caught up in emotion? People’s risk tolerance seems to change with the tide of the market, and they would be better off looking at things from a long-term perspective. It is crucial to understand truths about investing such as this to prevent from making an irrational decision.

Ideally, you should hang tight with your investments or reposition if the current conditions have changed your goals. Be thoughtful about making dramatic changes and do so with caution unless your perception is to protect yourself from a severe drop in the stock market.

Conclusion: Analyze the facts and your goals before making dramatic changes to your investments.

Truth 3: It is Impossible to Predict the Future of the Stock Market

The world of investing is very complicated, and you need to know the truths about investing. The amount of change and variables that occur on a daily basis is astounding. The reality is that nobody can predict what is going to happen in the stock market, not even in a 24 hour period. Navigating this type of unpredictability is very challenging.

Being that a person cannot predict the stock market, do not let anyone fool you into thinking anything but the truth. Can you monitor trends and do your research to give you a leg up when investing? Absolutely, and having a well thought out strategy is what gives you the best odds of success. Remember it takes years to build wealth, but only a fraction to destroy it.

Another mistake that occurs is that people assume these investment pundits on television are geniuses, and they take their advice blindly without research. Base your strategy and investments off your personal goals, none other. Do your due diligence before investing and make sure your approach is in line with your goals.

Conclusion: Think, research and then invest.

Truth 4: Some of Your Investments Will Make Money, and Some Will Lose, Accept It

When you begin investing in the stock market, you need to work on being as pragmatic as possible. Many people let their emotions overtake them as mentioned before, and the results are usually unfavorable. You might make a lot of money with your investments in the stock market, but you will have investments that did not go as planned and end up in the losing column as well.

Nobody that has ever invested in the markets has won 100% of the time, not even the top professionals. The difference between the professionals and the average investor is their ability to not get emotional about losses.

Investing in the markets is all about being consistent with your returns. For the average investor, investing in the markets can be a vicious cycle. One year you can make 20%, and the next year you lose 15%. Frustration and flawed actions then occur because of this up and down emotional ride.

Conclusion: Avoid letting emotion drive your investment strategy and shoot for consistency.

Truth 5: Fees Matter but so Does the Value You Receive When Understanding Truths About Investing

An investor should always be cognizant of the fees they pay. Now, this does not mean that paying for a service is a bad thing, but you need to make sure you are getting value. Whether you are working with a professional or handling your investments yourself, you should know what you are paying.

Most professionals charge a flat percentage fee, and the cost ranges depending on the individual. Be careful and don’t just look for the lowest price. Understand the value you are getting for paying the fee, first and foremost.

If you decide based entirely on fees and don’t analyze the value, you will not have made the best assessment. Remember, you get what you pay for, and that applies to your investments as well.

Also, make sure you are aware of your trade costs on top of the investment fee. If you are managing your account yourself, many brokerage firms offer$9.00-$12.00 fees per trade. Trade costs can add up very fast, so make sure you have the correct strategy, or you could end up costing yourself a lot of money.

When working with a professional, their trade costs are across the board. Some professionals will include trade costs in the fee they charge, and the trades they make will cost you zero. When engaging with a professional, not paying trade costs is the most favorable route. Truths about investing such as this could potentially save you a great deal of money.

Conclusion: Understand the value you are receiving, and investment fee structure, then decide the best approach that works for you. Fees are only an issue if the value doesn’t justify it.

Truth 6: Day Trading is a Full-Time Job, and Most Investors are Not Profitable Doing It

Day trading means that you decide to buy a stock for a short timeframe, let us say for a day. The objective of this approach is to make a small amount of profit and then try to compound those gains over time. Day trading is one of the most misunderstood truths about investing.

Professional investors have better information and faster computers than you do. You will never beat them short-term trading. Don’t even try. A study was conducted back in 2010 by Brad Barber at the University of California, Davis, revealed that only 1% of day traders could earn money consistently. This study observed the trades between the years of 1992 to 2006.

If you are looking to day trade to help fund your retirement or think it will help you retire early, it would be wise to rethink your strategy. There is tremendous volatility in day trading, and traders must depend upon market fluctuations that are needed to earn their profits. If a retail investor wants to make money day trading, then they will have to make it a full-time job. Proceed with caution.

Conclusion: Only opt for day-trading if you have the time and flexibility to alter your strategy as required. Day trading is a full-time job that requires the utmost precision.

Truth 7: Recessions are Inevitable and Happen More Frequently Than You Think

When you decide to invest in the stock market, you are taking a certain amount of risk to receive a certain amount of possible return.

Therefore, your investment strategy should be designed to deal with the worst-case scenario. You should prepare mentally for the fact that there could be at least ten recessions within the next 50 years.

The reality is that economic recessions create significant losses in the stock market. What you need to remember as an investor is how the stock market has behaved before, during, and after the recession.

The positive side of the picture is that markets have historically rebounded sometime after the recession, but until then, you need to create a well-defined strategy for your investments. Understand the truths about investing when it comes to recessions to avoid investment traps.

Conclusion: Recessions will occur, and you should have a strategy to prevent severe losses. Understand the risk and reward scenario before you make your investments.

Truth 8: The Best Investment Strategy is the One Based on Your Personal Goals

When you are investing in the markets, the first question you should ask is, what am I trying to accomplish? There is no magical portfolio or stock to invest in, and it all starts with your goals. Have you identified your short-term, intermediate, and long-term goals? How does investing in the stock market fit in with them?

There are many different types of investment strategies, and you need to make sure you find the correct one that fits your goals. Once your goals are well thought out and written down, you will have a much easier time identifying the strategy that meets your needs.

Reach out to a professional to assist you with this process. A good wealth manager can help you create a personalized plan and devise a suitable strategy that will help you ascertain your goals and objectives.

Conclusion: Invest in hiring a wealth manager who can help you come up with a personalized plan and strategy to invest your money.

Truth 9: People are Rarely Greedy When Others Are Fearful

If logical thinking were to prevail when markets decline 10%, then everyone should be buying, correct? However, most people do the opposite and sell, or take no action at all. Paralysis usually kicks in, and people don’t know what to do, or they get emotional. Highlighting yet another one of the truths about investing.

What is important to understand is that humans are emotional creatures and we make a lot of decisions based on emotion. Even though we know that historically it would be best to buy when others are fearful, we rarely take this approach. We recently saw this with the recent cryptocurrency mania that occurred.

Technology has been a blessing and a curse in this regard. We now have at our fingertips the ability to buy and sell investments from our computer or smartphone. However, this instant access also makes it easier for us to act on emotion rather than thinking pragmatically about the current market situation.

How can you best combat the emotional state of a market correction? Investors should create a systematic way to invest and not deviate from it. For example, maybe you have been looking to buy Proctor & Gamble. The next time Proctor & Gamble drops 8% or more I am going to buy, no questions asked. Another example could be that if the S&P 500 pulls back 10% or more, I am going to buy another 5% of each position in my portfolio.

Write out your buy discipline and execute when the opportunity arises. Your systematic approach will have been well thought out with logic and will allow you to fight off emotional reactions. Therefore, putting you in a position to capitalize on one of the truths about investing.

Conclusion: Create a systematic way to invest and stick to it. Removing as much emotion from your investment portfolio will pay big dividends in the long run.

Truth 10: Don’t Invest in the Markets if You Have a Significant Amount of Credit Card Debt

If you have a 401k and they provide a match, I would suggest you still contribute up to the match to get the free money. However, above that match, a person should aggressively be attacking their credit card debt.

You should not be thinking about investing in the stock market, real estate, or anything else. People continue to leverage and overextend themselves even when they have a significant amount of debt, which is a big mistake.

Credit cards on average range from 15%-30% in interest charges. If you are only paying the minimum every year, you will forever be in debt. Based on that knowledge lets say your average interest charge is 20%. You will be hard-pressed to find any investment out that there that consistently will pay you 20% every year.

Therefore, if you cannot generate this return on a guaranteed basis you are better off paying down your credit card debt. One thing that you can guarantee is that your credit card interest charge of 20% will happen every year.

Conclusion: Pay down your credit card debt before looking at future investments above your 401k match. Understanding truths about investing such as this will save you thousands of dollars.

Now that you are aware of these truths about investing in the stock market, you will be better prepared to decrease your risk and grow your wealth. When investing, shoot for consistency and stick with the personalized investment strategy that you have created.

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Please note that all investments are subject market and other risk factors, which could result in loss of principal.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS.