Investing mistakes can cost you time and money (total return). If you confront the most obvious of these issues, you’ll put yourself 90% of the way home.
The feeling that “I’m missing out on great returns” has probably led to more bad investment decisions than any other single factor. Many investors select asset classes, strategies, managers and mutual funds based on recent strong performance. If a particular asset class, strategy or fund has done extremely well for three or four years, we know one thing with certainty: we should have invested three or four years ago. Now, however, the particular cycle that led to this great performance may be nearing its end. The smart money is moving out and the dumb money is pouring in. Pure logic tells us that we should buy low and sell high. Why, however, is it that most of the investing public (shown in study after study) does exactly the opposite? Is there a solution? Sure there is; formulate an investment plan where you’ve taken a long-term strategy on diversification and risk. Then, don’t be dumb. Stick with your investment plan and rebalance, which is the polar opposite of chasing performance.