Today is April Fool’s Day, so what I wanted to do was rather than try and play a trick, is give you 3 tips on how to not be fooled by the stock market.
Tip number one is to choose who you listen to. Whether it’s the guy at the gym or your brother-in-law talking about how they made a ton of money investing in NFTs or sneakers, or the articles you can see on Yahoo! Finance with the new penny stocks and the guy who “predicted and bought Google at $2 a share” now has a new prediction for you. The thing with most of those is they’re going to tell you about the times they got stuff right, but not about all the times they got stuff wrong. That’s the selling key to these subscription-type services, they are trying to encourage you based on the times they got things right not necessarily the ones that are wrong. They’re trying to essentially catch lightning in a bottle again and may not be aligning with what’s actually best for you and your goals. So, choose who to listen to, make sure that you can trust them, and that they are trying to give recommendations that align with what you’re trying to achieve.
The second tip is to not listen to yourself… most of the time. As investors, we tend to let our biases come into play in decision-making. Whether that be a past bias like “I should have seen that recession coming” or “I knew Facebook was going to blow up, so I should be able to pick this next stock” or another common one is “I really got burned last time, so I’m going to get out early this time and stay out.” A lot of times we let our emotions come into play and let those biases really curtail our view on things and it can sometimes cloud our judgment a little bit. So it’s better to try and turn down the volume inside your head and instead find somebody that you can trust to make sure you’re not making emotional decisions when it comes to investing.
The third tip kind of goes right along with that and that’s investing for the long term! “Enjoy the ride!” The ride will be bumpy if you’re investing for the long term because there are going to be ups and downs in the market, that’s just normal market behavior. But, if you have a long time horizon and you understand you’re not using the money tomorrow, it’s a lot easier to enjoy that ride and have these waves or troughs come in and not freak you out so much. A good example of this can be found in an article put out by thebalance.com1 recently that said in the 20 years from 2000 up until the end of 2019, the S&P returned just over 6% annually and the average investor over that same time period averaged 4.25%. A lot of that difference has to do with most people selling as the market is coming down (when they get afraid) and buying when the market is going up. We tend to buy high when we want to participate and are excited about it and we tend to sell low when we start to get freaked out and think the end is coming. Unfortunately, this is the normal cycle of most investor behavior, I told you we are irrational! Now if you’re investing for the long term, you’re not really concerned about trying to catch the ride up or miss the ride down, you’re just letting it ride and aren’t as inclined to make these mistakes.
So, don’t let the market make you look like a fool this April. Try and do these three tips – I know they’re easier said than done – but invest for the long term, tune out the noise, and only tune in to the noise that you want to hear. Y’all have a good one!
- Source: https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519