"Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes." — John Bogle, founder of Vanguard Funds.
You’ve probably heard that investing money in the stock market is the best way to grow your wealth over the long-term. That’s only true if you avoid mistakes. Unfortunately, many of your natural tendencies can seriously handicap your ability to get rich from the stock market. For instance, we’re set up to listen to the news, follow the crowd, and run for safety when danger is afoot—but those tendencies can turn the stock market into a losing proposition. Here are some of the little investment mistakes you need to learn to sidestep if you want to make money from your investments.
- The more you buy and sell your investments, the greater your chance of losing money.
- Don't pay high management fees, which can eat into your investment's earnings over time.
- If your employer matches a percentage of your contribution into your 401(k) or 403(b), then you’re throwing away free money if you don’t contribute.
- Taxes play into most financial decisions, and placing your financial assets in the wrong types of accounts will cost you.
1. Trading Too Much
The more you buy and sell your investments, the greater your chance of losing money. If you invested $10,000 in the S&P 500 in 1995 and stayed invested through 2014, you would’ve earned 9.85% annually, or $59,593. Yet, if you had missed the best ten days during that 19-year period, your return would have fallen to 6.1%. Nineteen years later, your initial $10,000 would have been worth $30,803.
Timing the market is a losing proposition, and even the best rarely win.
2. Ignoring Fees
Before turning over one dollar to a financial advisor or investment fund, understand the fees. Yes, every fund has an investment management fee, which ranges from 0.02% to over 1.0%.
The SEC.gov website explains the impact of higher fees on your investments, but here’s an example: Assume that you’re a conservative investor and invest your $100,000 inheritance for 20 years in funds that return an average of 4% annually. At the end of the 20 years, the investment that charged a 1.0% fee would be worth $180,000. The investment that charged 0.25% would be worth $210,000. That’s a $30,000 difference between the high- and low-fee funds.
Don’t make the mistake of paying high fees. You can get wide diversification from Schwab’s S&P 500 Index Fund (SWPPX) for a rock-bottom 0.02% annual management fee.
3. Not Investing Enough in Your 401(k) to Snare the Employer Match
If your employer matches a percentage of your contribution into your 401(k) or 403(b), then you’re throwing away free money if you don’t contribute. Many employers match your own retirement plan contribution dollar-for-dollar, up to 5%. If you’re earning $70,000 per year, not investing $3,500 in your own retirement account is not only depriving you of the chance to build up a robust retirement account, but you’re telling your employer, “I don’t need your $3,500, so why don’t you keep it?”
4. Putting Investments in the Wrong Accounts
Taxes play into most financial decisions, and it’ll cost you to place your financial assets in the wrong accounts.
Once you’ve maximized your 401(k) match, it pays to be smart about which investments go where, as different investments get taxed differently. If you’re looking for investments to put in a taxable account, you should look to stocks, low-turnover stock mutual funds, and municipal bonds that you expect to hold for the long term. That’s because your stock gains are taxed at the capital gains rates, generally lower than the ordinary income tax rates. In most cases, you’re best off placing bonds, taxed as ordinary income, in tax-advantaged retirement accounts.
5. Trying to Beat the Market
Don’t try to beat the market, because chances are that you won’t. Chasing glamorous momentum-investment strategies likely won't pay off. In 2015, 66% of active money managers failed to beat the market returns. If you like those odds, consider that between 2005 and 2015, 82% of active fund managers failed to beat the returns of the S&P 500 market index.
Great investors such as Warren Buffett and John Bogle, founder of Vanguard, champion the idea of investing in low-fee, market-matching index funds, and the historical stock market data appears to back up their recommendation to invest for the long haul in index funds.
That's why they advise that investors not try to beat the market, because the chances are that most investors won’t. However, such individuals are in the business of managing long-haul funds, so their recommendation is not entirely altruistic. Consider that in any given year, 60% to 80% of all fund managers fail to beat the returns of the S&P 500 market index. Fund managers have the same difficulty that individual investors have as well. It is tough to beat benchmark average returns.