In his book, “The One-Page Financial Plan”, Carl Richards coins the phrase, “The Big Mistake”, to refer to the act of buying when the market is high and selling when it is low. This is likely the biggest mistake that you can make as an investor yet people make it all the time. Why does this happen? What behaviors and situations cause this? How can I avoid making, “The Big Mistake”? The key driver for The Big Mistake, is emotional investing and a lack of a clear plan. It feels really great when you see your account go up in value. But the pain of watching your account plummet during a recession is even greater. Thousands if not millions of people experience these exact same emotions and act on them in large numbers. But think about that for a moment. In what other situation in life would you intentionally buy something when the cost to purchase it rises and then sell it when it becomes less valuable than what you paid for it? That is exactly what the majority of investors do all the time and it is a direct result of investing emotionally and without a plan and neglecting to think about your investments as an asset.
To show you what I mean by that last statement, consider buying a house. Let’s say that you purchase your home for $250,000. The value of your home fluctuates over time based on what is going on in the market and the economy overall. Should the economy be in good shape, that home may now be worth $300,000 which means you could sell your home at a profit of $50,000 (of course that doesn’t take into consideration a mortgage if you have one but you get the idea). Now consider a situation where the market turns downward and now your home is only worth $190,000 which is $40,000 less than what you paid for it. Obviously, it doesn’t make much sense to sell your home in this situation even if you are afraid about what the market is doing.
Ironically, even though pretty much everyone would agree with the wisdom of this example, those very same people would do the exact opposite, in the very same situation with their investments. So what’s the lesson to learn to here? The bottom line is that for all intents and purposes, you should be treating your long-term investments as you would your home. Just like your home or any other large asset for that matter, you have a plan for your investments and goals that are tied to them. You cannot afford to make emotional decisions about your finances that deviate from your predetermined path. Of course, we all make mistakes and that’s ok as long as we get ourselves back on track and don’t repeat the destructive cycle of trying to the time the ups and downs in the market. Remember, long term investing is about time IN the market not TIMING the market.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.