What is the biggest mistake most investors make?

Date: Nov 12, 2018

When asked “what is the biggest mistake most investors make” my answer is invariably the same – instead of considering time in the market they try and time the market and act largely on emotion.

If you’re an experienced day trader then timing the market can deliver huge short term rewards but for 90% of the investing population, they simply do not have the appropriate resources or the time required to do this effectively week after week, year after year and into retirement.

If your not a day trader then time in the market is by far the better option but as advisers we understand that it does take some strong nerve at times.

I discussed this recently with PIMCO’s Australian bond division where two very simple case scenarios were considered where an investor held an opening balance on their portfolio of $100,0000 at the beginning of 2006. For 18 months or so they happily watched their funds grow to more than $111,000 but as markets turned mid 2007 the outlook was bleak:-

In one case the investor holds their nerve until their portfolio hits $90,000 then against advice they make the decision to bail out, crystallizing a loss of around 19%. As the market dropped still more they praised their decision yet while waiting for the recovery to begin they completely miss the start of the upswing thinking it a false kick and reinvest their $90,000 late in the rally. By mid 2010 they have recovered to around $93,000.

This investor, while feeling every ounce of the pain that these events induce, heeded advice and held their nerve throughout the whole period and by mid 2010 their portfolio is once again sitting at it’s high of $111,000. If you and your adviser have taken the time initially to correctly research your investment and determine that on a long term basis those investments will deliver on your stated objectives then the quality of those investments should endure and the objectives be met. Sure there will undoubtedly be some tweaking along the way but these changes should not be driven by emotion, the worst of which is fear. You pay your adviser to advise you and this is never more important than during times of crisis.

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