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Most people know this investing advice: buy low, sell high. And while it sounds simple, it’s actually very hard to do. Many people invest with good intentions, hoping that their money will make money without lifting a finger. However, many people lose money instead.
Personal finance expert and New York Times bestselling author, Suze Orman, addressed the challenges of being an investor on her podcast. In case Entitled “The Suze School: The Biggest Mistakes You Make as an Investor,” Orman shares some advice to help you organize your investments.
succumb to fear
Investing can be scary, especially if you’re putting a lot of money into a stock.
Consider this: Maybe you do research and find an excellent stock. You think about buying some shares, but because of the risk you decide not to invest. After a short time, as you predicted, the stock goes up, and you find yourself at a loss because you missed your opportunity.
Orman says the biggest mistake you can make in investing is making decisions based on fear. During his time as a stockbroker, he found that his clients fit into two categories: those who invest and hold on no matter what, and those who invest and sell even at the slightest decline in price.
Investors who give in to fear face myopic loss aversion (MLA). MLA is also known as an investor’s tendency to focus more on a stock’s short-term results rather than its long-term gains. As Orman observed, MLAs often sell investments too early and lose potential profits.
DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) found that investors with $100,000 who bought and held the S&P 500 throughout 2023 would earn $26,288 and end the year with a total of $126,288.
But to do this, investors must maintain their investments through several drawdowns. Orman found that his clients, who held stocks because they were confident in their selection, made much more money on average than those who sold out of fear.
One way to avoid succumbing to fear is to reframe risk. Try to view risk as a potentially beneficial part of your journey rather than as a potential loss. Recognizing and changing your fears can help you keep your investments and achieve greater profits in the long run.
focusing on what you had
While investing it is important to focus on the present. Thinking too much about what you had before instead of what you have now can distort your perspective.
If you buy a stock at $10 and it rises to $50, you will make a huge profit and be very happy with your decisions. If that stock drops from $50 to $20, you, like many investors, may feel like you’ve lost your money.
But on the other hand, you haven’t actually lost $30 per share. You still have a profit of $10 per share.
Orman explains that investors should never look at the profit they received as a loss. You should compare your stock values to the price point at which you purchased them.
Making decisions based on your expected profits rather than your anticipated losses will lead to greater success.
Not using dollar-cost averaging
When you invest, the value doesn’t always increase. The price will drop often, and if you have already invested all your money, you will miss an opportunity.
For example, let’s say you put all your money into a stock that’s worth $50 a share, but it starts to decline. Because you have invested everything outright, you are losing money and missing the opportunity to buy that stock at a lower price.
Many people think that they need to immediately invest all the money they have set aside. According to Orman, this is a big mistake. Dollar-cost averaging is his most important investing rule.
Dollar-cost averaging is an investing strategy where you invest a fixed amount of money at regular intervals instead of everything at once. By doing this, you can take advantage of the price drop to buy more shares of a stock for the same amount.
Fidelity showed how it works with $5,000. When all $5,000 was invested outright in $20 worth of stock, it resulted in 250 shares. The same $5,000 was then spread out into fixed investments over 5 months, with the stock price fluctuating between $18 and $21. This resulted in dollar-cost averaging yielding 253.4 shares, while the lump sum investment yielded 250 shares.
If you are patient and willing to take your time you can get more for your money. Ultimately, it pays to wait for the right opportunity.