Investing can be an incredibly efficient way to grow your money — but only if you’re consistently smart about it. Over the past three decades Carver Financial Services has been guiding clients to financial well-being we have witnessed decisions that resulted costly mistakes. Now, we all make mistakes; we’re only human. By being aware of them, and by working with us, you can avoid these mistakes and optimize your outcome.
Here are nine of the most common mistakes investors make — along with how we can guide you toward avoiding them.
- Trying to time the market
Heeding the adage to “buy low, sell high,” many investors attempt to time the market by waiting to buy when stocks are low, and waiting to sell when stocks are high. However, knowing the exact correct time to buy or sell just isn’t possible, and it can lead to costly mistakes.
In 2021, Bank of America looked at market data going back to 1930. The study found that if an investor missed the S&P 500’s 10 best days each decade, the total return on their investment would stand at 28 percent. If, on the other hand, the investor held steady through the ups and downs, the return would have been a whopping 17,715 percent!
Another study released by University of Michigan Professor H. Nejat Seyhun, examined the market on a daily basis from 1963 to 2004. Professor Seyhun found that in this specific time period 96% of the market’s return happened in only 0.9% of the trading days. So out of the 7,300 days that took place over 41 years, only 135 yielded the majority of invest return. Your odds of guessing the “correct” day to cash out are very low.
Additionally, CNBC publish an article showing what happens if you miss the best 20 days over a 20-year period. Based on their findings and our calculations, if you invested $100,000 on Jan 1, 1998, that money would grow to $177,560 over 20 years. However, if you missed the 20 best days over those 20 years, you actually lost nearly $20,000, ending up with $80,090.
Keep in mind, the market’s best days typically follow the largest drops, meaning panic selling can lead to missed opportunities on the upside.
This is one way in which working with our experienced team can benefit you significantly. Our investment philosophy relies heavily on NOT timing the market. We also do not believe in “buy and hold.” You must take a very proactive approach to re-balancing and reallocating your investments based on your changing needs, market opportunities, and tax law updates.
- Focusing on how much you make instead of how much you keep
It’s not how much you make that’s important but how much you keep; net of taxes, fees, and expenses. Our team members are experts at minimizing internal expenses and managing income taxes on a customized basis. Often, people focus on the total return instead of the net — which could still lead to
- Letting emotions drive your decisions
“A lot of people with high IQs are terrible investors
because they’ve got terrible temperaments.
You need to keep raw, irrational emotion under control.”
There will always be new challenges along with the return of old ones. The key to investing is avoiding making decisions based on bad information and emotions including fear, greed, and the range of others.
Most investors know it’s unwise to have knee-jerk reactions to market fluctuations, but many find it difficult to avoid that very human tendency. It turns out that our brains are actually hard-wired to react emotionally to information we perceive to threaten us in some way.
Certified financial planner Michael Finke, a professor of wealth management at The American College of Financial Services, explains that there may be a number of psychological biases holding people back from building wealth. He says the part of the brain that allows us to imagine the future doesn’t move as fast as the part that governs emotions. As a result, we might sell off investments just to pacify the emotional part of the brain, instead of thinking ahead.
Finke mentions additional psychological biases that can lead us to make unwise decisions. One is loss aversion. He says the innate desire to avoid any risk that could result in a loss causes many investors to underperform the market. Another is the bandwagon effect, which is following what other people are doing. Finke points to the recent run-up in so-called “meme stocks,” like AMC Entertainment and GameStop, which individual investors flocked to after being prompted by social media. Many lost money amid the volatility.
Working with our experienced team can help you avoid making emotional decisions about your finances. Once we determine what your vision and goals are, we will work to keep you on track for the long term and to weather the inevitable market fluctuations. We are here to guide you on your financial journey and help you achieve your personal vision, whatever that may be.
- Being impatient
“The stock market is a device to transfer money
from the impatient to the patient.”
A slow and steady approach to portfolio growth can yield greater returns in the long run. History has proven this.
For example, if you had bought Apple stock at the end of 1990, you would have paid 38 cents (split-adjusted) per share. In 1995, 1996 and 1997, the stock was down 18 percent, 34 percent and 37 percent, respectively. Those downturns likely caused many investors to panic and sell. But in 1998, the stock was up 211 percent, and in 1999, it was up 151 percent. If you held on to the stock, the price at the end of March 31, 2021, was $122.15 per share. Your patience would have paid off.
Our Personal Vision Planning Process takes a very international and disciplined approach to investing. We believe that the “buy and hold” strategy is better than market timing; however, it doesn’t take advantage of market volatility. Working with a trusted advisor can help you avoid the instincts, often instigated by impatience, that cause investors to fail. In this regard it’s important to work with a team who is not only technically proficient and has experience; but also understands your personal needs, concerns, and goals.
- Failing to diversify
Diversification is the process of investing in a variety of different types of investments so you’re not too exposed to the risks of any one investment. Investors who fail to diversify their portfolios tend to miss out on growth opportunities.
Diversification is such an effective strategy, in fact, that it can increase your overall return without your having to sacrifice something in exchange. In other words, diversification can actually reduce risk without costing you on returns.
“The best time to plant a tree was 30 years ago.
The second best time is now.”
Just like the tree in the proverb shown above, the best time to invest is early. The longer you leave your investments in place, the more they can grow.
Because of the “magic” of compound interest, time is your friend when investing.
Which means the sooner you start, the better. However, it’s never too late to start investing! The pandemic has prompted a renewed interest in investing. A Schwab survey reports that 15 percent of all current U.S. stock market investors say they first began investing in 2020.
“Compound interest is the eighth wonder of the world.
He who understands it, earns it. He who doesn’t, pays it.”
- Investing money you might need soon
Because investments, when they perform well, can boost your assets, it can be tempting to put all your money in them. Yet this can end up costing you if you need money right away for an emergency, and the value is down.
This is another area in which our team can benefit you. We will work with you to put aside an appropriate amount of money in an easy-to-access emergency fund so you don’t need to rely on your investments when you face an emergency or want to make a big-ticket purchase. We can also advise you on lines of credit and other sources of funds for short-term needs that may not impact your portfolio.
- Ignoring the tax implications of your financial moves
Taxes are one of the most confusing topics in the world of financial planning. And to make matters worse, state and federal tax laws often change. Our team constantly pursues continuing education to keep up-to-date on the tax laws and other legislation that can affect your portfolio.
One wrong move can have serious tax implications. We encourage you to work with our educated, experienced team to avoid negative tax consequences of financial decisions.
When you work with our team, we will work with you, and your tax expert, to minimize the tax consequences of the investment decisions you make.
- Having no clear vision for your future
“If you have no destination, you will never get there.”
We have found that, overwhelmingly, those investors who have a clear picture of what they want in life are more inclined to reach their financial goals than those who have no clear vision.
At Carver Financial Services, our proprietary Personal Vision Planning® process is an all-encompassing approach that ensures we lay the groundwork for a strong and successful investment strategy based on your goals. Often, clients don’t know what is truly important to them. We can help you define this. Your vision for the future serves as your and our road map for the way we invest your money. We want to know what gets you up in the morning and what keeps you up at night — because your vision is our priority, and we are here to help you achieve it. We also believe it’s important to work with a team, rather than an individual. This may provide for a broader knowledge base and continuity in the event one of the team members is no longer available.
Ultimately, the true value we add is being here to listen to you, guide you, advise you and help you chart a course, especially through uncertain times. Often, the most important things we do prevent situations that would have happened if you had not sought help from experts.
Being proactive is always better than being reactive. Understanding what we can and cannot control, and planning accordingly, are keys to success. The value our trusted team of advisors brings to you goes far beyond just good investment advice or peace of mind.
Regardless of what happens, we are here for you. If you have $500,000 or more in investible assets, feel free to reach out to me personally or to our team with questions, or whenever we may be of service. I founded Carver Financial Services more than 30 years ago, with the mission of helping you achieve your personal vision while simplifying your life. We are here to assist you as you navigate both good times and bad on your personal life journey.
Randy Carver, CRPC®, CDFA®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Randy has more than 32 years of experience in the financial services business. Carver Financial Services, Inc,. was established in 1990 and is one of the largest independent financial services offices in the country, managing $2.2 billion in assets for clients globally, as of December 2021. Randy and his team work with individuals who are in financial transition as a result of divorce, retirement or the sale of a business. You may reach Randy at firstname.lastname@example.org.
The information contained in this post does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.