3 biggest investing mistakes that will crush your growth

Three mistakes to avoid in your portfolio

 If you’re an investor, you’re familiar with the opening bell. It rings to signify the start of the trading day and is when the frenzied action on the floor of the NYSE kicks into high gear.

If you’re a golfer, you’re familiar with Golden Bell. The 12th hole at Augusta National is the mid-point of Amen Corner and has been referred to “the hardest hole in tournament golf.”

Both bells are rife with opportunity and danger and require a good bit of execution to navigate successfully.    

The par three version of these bells clocks in at a slight 155 yards.  The green measures no more than 14 yards deep at any one place and is well fortified on all sides. The front middle of the green is guarded by a large bunker. To the right is a sloped bank so slick it will roll any shots short of the mark back into the Rae Creek like a marble down a driveway. A shot long of the green will likely find one of two bunkers on the embankment behind the hole, setting up one of the most harrowing sand shots in golf.

No one has ever won the Masters on the twelfth hole, but more than a few have lost it. 

In 1996, Greg Norman punctuated one of the most epic collapses in the history of the game at twelve.  He began the day with a six-stroke lead over Nick Faldo, but by the time they were both teeing it up at Golden Bell they were tied for the lead.  Norman put his tee shot at 12 in the water, which pretty much sealed the deal for Faldo who cruised his third green jacket. 

In 2016 Jordan Spieth arrived at the 12th tee with a three-stroke lead over Danny Willett.  After playing a risky shot at the right pin placement that met the same fate as Norman’s a decade earlier, he chunked his second shot into the water as well.  The hole would end with Spieth taking a quad-bogey and Willett holding a one-stroke lead on his way to his first Masters championship.

While he wasn’t in contention at the time, Tom Weiskopf recorded a thirteen at the twelfth in the first round of the Masters in 1980.  It remains the highest score on any hole in Masters history. He did manage to recover with a quadruple bogey seven the next day.

Author Rick Reilly once penned,

“More green jackets have been lost at the 12th than at the Augusta City Dry Cleaners.  When the Masters comes to shove next Sunday, you can bet somebody is going to walk away from 12 looking as though he had just heard from the IRS. Or 60 Minutes.”

Investors in the stock market can face a similar fate.  Many have lost their shirts at one point or another.  Others who allowed themselves to be guided by greed have attracted the attention of the IRS, and probably the least fortunate of the bunch have made front-page news for some not-so-admirable investing behavior.  

However, there is a solution to solving Golden Bell.  Take it from the man who has mastered the Masters five times.

“Safety first. If you can hit it to the middle of the green, it’s a relatively flat putt to the back-right hole location, so it’s makeable.” – Tiger Woods

It sounds like a relatively simplistic strategy coming from two legends of the game.  Execute a safe shot to the middle of the green, and don’t worry too much about the direction of the wind.  But if it’s so easy, why have so many of the game’s greatest players failed to execute it? 

While they may be sane, golfers aren’t always rational.  The allure of a birdie at the short par three hole with a green jacket on the line can be very tempting.  However, more often than not, Golden Bell does not reward greedy golfers. 

Greedy investors are often met with a similar fate.  Here are three of the mistakes you should avoid when managing your portfolio. 

1.       Timing the Market

“The first rule of compounding is to never interrupt it unnecessarily.” 

-Charlie Munger

Situated in the lowest part of the course, the swirling winds on the tee box at the twelfth hole at Augusta National often taunt the players and their caddies as they plot their course of action. They search for clues as to the direction of the gusts by examining the tall oaks and pines to the left of the hole or reading the direction of flag sticks on the 12th and 11th greens.  They are often sent away with conflicting signals.

Lucas Glover once asked his caddie which way the wind was blowing, and he simply replied, “Clockwise.”

Jack Nicklaus, the owner of five green jackets himself, sums up the quandary of the wind at the twelfth tee by saying, “The more you worry about the wind, the less chance you have of executing the shot that you really want to play, which is really right over the middle of the [front] bunker.”

Simplicity reigns supreme. 

In the same way that trying to read the wind on the twelfth tee at August National has left many perplexed, history has proven that trying to time the market is a fool’s errand. 

None of us have a crystal ball to predict when the next big crash will happen.  Even if we did know when the next bubble was going to pop, we would also have to know when to get back into the market for a market timing strategy to actually work. 

Timing the market means being right twice, and the problem with selling out to avoid the next market crash is that it often results in missing some of the market’s best days as well.  This is because volatility comes in clusters. 

Some of the largest market crashes are often followed by some of the largest market gains.  To find evidence of this, we need look no further than March 12, 2020, during the outset of the COVID-19 pandemic, when a 9.51 percent loss in the S&P 500 was followed by a 9.29 percent gain on the next day. 

In fact, out of the 20 largest single day losses in the S&P 500’s history, 12 of them were followed by one of the 20 largest single day gains less than 30 days later.  

2.       Overtrading

The emerging field of behavioral finance is dedicated to uncovering the irrational behavior we tend to experience when faced with economic tradeoffs.  Pioneers in the space like Richard Thaler, Amos Tversky and Daniel Kahneman have provided us insight into investors’ minds.  Their research has led concepts such as myopic loss aversion, which is the idea that we fear losses more than we value gains and tend to evaluate our investments with a narrow frame and too short of a time horizon. 

We’re prone to selling good, long-term investments that have bad days, thus costing us future investment returns.  This mental framing has proven to be costly in the long run.

Research using actual transaction records from retail investors backs this up. Records of 78,000 investors from a large discount brokerage were examined and broken into five groupings sorted from the most active traders to the least active, or the buy-and-hold investors.  The most active group, the traders, earned an annual return of 11.4 percent over the sample time period.  Not bad by historical standards, but the buy-and-hold investors earned 18.5 percent over the same time frame. 

By doing nothing, or significantly less, buy-and-hold investors outperformed their trading counterparts by more than 7 percent annually.   

3.       Chasing Returns

Investment returns are one of these numbers that get volleyed around a lot. 

Stock market performance is a daily topic on the evening news.  Anytime a stock is mentioned on an investment-oriented channel a chart with recent performance is sure to follow.  Even our smartphones have apps that put the minute-by-minute price movements of investments at our fingertips. 

The noise is easy to find. 

It’s not noise in the sense that investment returns don’t matter.  They do.  After all, we invest in stocks, mutual funds and ETFs to make money.  However, their daily, weekly, even annual performance, has nothing to do with the quality of investment they will be in the future. 

Don’t believe me?

Research from Dimensional Fund Advisors demonstrates this point.  As of December 2010, there were more than 3,000 US-based mutual funds an investor could choose from.  If you selected a mutual fund strictly on its performance over the previous five-year period and picked a fund whose performance was in the top 25 percent of all mutual funds in its category, you only had a 19 percent chance of that fund remaining in the top quartile of performers.  More likely than not, your fund would register an average performance, or worse, turn out to be a dud. 

This story plays itself out year after year and is a constant reminder that past performance of an investment is more noise than it is signal.  

Managing a portfolio with constant market volatility can be very similar to trying to hit the green with swirling winds.  It can be tempting to hit the risky shot and go for the pin, but the same sage advice that Tiger Woods and Jack Nicklaus provide applies to portfolio management: 

Safety first.  There’s nothing wrong with taking average market returns and keeping yourself in the game. 

How did you do this week?

Did you hold steady and stick to the long-term plan?

Or did you commit one of the critical errors that can derail your plan?

When the winds of market volatility are swirling, investing can be a dangerous proposition.

If this week was an eye-opener for you, there's three ways I can help -

1.  Ask me anything

Do you have money questions?  Are you over asking friends or the internet for advice?  As a newsletter subscriber, I’m happy to take 30 minutes out of my day to help you.  I'll do my best to be sure you leave with something of value to consider.

2.  Get a one-time financial plan

Over the course of 90 days, we'll help you get financially organized and offer up recommendations to achieve your financial goals.  You'll leave with answers to questions like:

Am I saving enough for retirement?

How can we pay less in taxes?

Do we need life insurance?

3.  Get fee-only financial advice

Hiring a financial advisor is a decision most people only make once in their lives - so we don't take it lightly.  We'll go through a three step process to show you how we work with clients, and let you make the decision if it's a good fit for you or not. 

If you've never considered hiring an advisor before, this is a great way to see what comprehensive financial planning looks like.

Schedule a 30 minute call to get started today.