You don’t have to earn a master’s degree in finance to understand the basics of the equities markets. With enough discipline, a willingness to learn and the humility to seek expert guidance when the going gets tough, just about anyone can manage their own finances for the long haul.
That doesn’t mean that “just about anyone” can dive right into the market and expect to beat the pros. Inexperienced investors inevitably make mistakes as they get their bearings, particularly during periods of economic turmoil.
While there are no guarantees in investing, it is possible to anticipate many of the potential pitfalls that afflict novice investors. Let’s take a closer look at four of the most common problems that can befall retirement investors and explore some possible solutions.
1. Getting Swept Up in Day-to-Day Market Movements
Market volatility is scary. And during really rough periods, it can be downright terrifying. During the throes of the financial crisis of the late 2000s, the equity markets would regularly swing several percentage points during the course of a single trading day, sometimes in the absence of substantive news. Though truly gut-wrenching volatility is somewhat rare now, it still happens every so often. When it does, it’s enough to give anyone heartburn.
Here’s some friendly advice: Don’t pay too much attention to daily market swings or try to see patterns where there are none. For instance, a bad January doesn’t necessarily mean that the market will finish negative for the year. Turn off the financial news, do your breathing exercises and stick to your investing strategy.
2. Adopting a “Follow the Herd” Mentality
There’s safety in numbers, or so it appears. In reality, following the investing herd is often riskier than charting one’s own course. The trick is to be confident enough in your decision-making abilities to offset the loneliness of the road less traveled. As long-running Forbes columnist Ken Fisher notes in his book Beat the Crowd, this approach (known as contrarianism) can open up previously invisible—and potentially lucrative—opportunities.
3. Failing to Account for Your Entire Time Horizon
What are you investing for?
That question can have more than one answer, of course. But each answer correlates with a specific time horizon. For instance, if you’re a 30-year-old investor targeting a specific portfolio size on your 65th birthday—the day you hope to retire—your time horizon is 35 years. If you aim to have enough for a down payment on your dream home within three years, your time horizon is three years.
As Wise Bread wisely notes, time horizons can help you make sense of investing—and worry less about it. Conversely, failing to account for your time horizon can really hamper your investing strategy and do long-term harm to your household finances. In fact, it can lead you to invest aggressively in an attempt to compensate for underperformance or a late entry into the market, raising your risk of investing errors that rob your nest egg.
4. Repeating the Same Mistakes
You know the colloquial definition of insanity: doing the same thing again and again and expecting a different result. While it’s not really polite to call any investing strategy insane, it’s not controversial to say that some strategies are less prudent than others.
The key is recognizing when you’ve made a misstep and taking decisive action to correct the problem so it doesn’t happen again. Like history, the market repeats itself—if you invest long enough, you’ll learn to spot patterns in the noise, even if you never encounter the same situation twice. This takes humility, a recognition that you don’t (and can’t) have all the answers.