“Buy low and sell high. It’s pretty simple. The problem is knowing what’s low and what’s high.” - Jim Rogers, Chairman of Rogers Holdings and Beeland Interests, Inc.
Buy low, sell high, four words that make the idea of investing in the stock market seem exciting and simple. The reality, however, can be overwhelming and frustrating, particularly if your investments aren’t performing as well as you expected in the markets. Maybe you heard the latest buzz about a new and upcoming technology that had you jumping at the chance to be a part of the action – only to realize later that you purchased high and now their stock price is dropping. You’re not alone.
Blackrock reports, “The average investor, over a 20-year span ending in 2015, underperformed the S&P 500 by six percent.”
Below are a few key reasons that uninformed investors don’t make more money in the stock markets.
Most people understand the concept of diversification - essentially it means not putting all your eggs in one basket. Another way to describe it would be “asset allocation.” However, what many people don’t realize is that they may have unintentionally undiversified their assets. One example of this is when a large portion of their investment is in their employer’s stock. Knowing the company can bring comfort; however being employed and holding a significant investment in the same company can create more risk (i.e., remember Enron and Worldcom?). Alternatively, we also see this undiversified portfolio when an investor holds a number of different stocks but they all belong to the same industry group. For example, investing in a variety of technology companies isn’t really diversifying, as they will most likely be impacted by the same market trends.
Similar to above, another mistake that uninformed investors make is favoring stocks from USA-only companies. This may be due to familiarity of USA-based brands and products. While supporting national companies can be attractive, informed investors know they need to diversify their stocks globally. Like industry sectors, international and domestic investments may not react similarly to downturns or upticks in the US economy versus the global economy. By owning both types of investments, you are diversifying your risk-volatility.
Volatility is one measure of the rate at which a stock’s price will increase or decrease, creating a difference in returns over time. Often, choosing a more volatile investment can be aligned with taking more risk to gain a higher return. Long-term investors can often weather volatility more so than investors who are closer to retirement and needing protection of their savings. Aside from volatility, there are many more measurements to consider when choosing the right investment for your goals.
Investing is complicated when you are trying to save for your retirement. Different strategies will work for different investors. It is important to have a vision and a plan before investing your money. Choosing the right investments to fit your risk tolerance and length of time to invest before needing the money while providing liquidity when you need it can be tricky. It’s important to understand the reasons for taking risk and diversifying. An experienced financial advisor can assist you in moving from an uninformed investor towards an informed investor.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.