Mistakes in investing are inevitable, but by avoiding the most most common investing mistakes you can save yourself hundreds of thousands of dollars over a lifetime. We asked our Motley Fool investing experts what they thought were the most common investing mistakes that investors make.
: One common mistake that costs investors dearly is being too active.
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While the S&P 500 rose an average of 9% a year between 1994 and 2013, the average stock fund investor only earned 5%. That is roughly half the return as someone who is following a simple strategy of simple index investing.
This is because investors have a tendency to be overly active and chase performance. That is, investors buy stocks and markets that have done well recently and sell stocks that have done poorly. Senior Economist YiLi Chen at the St. Louis Federal Reserve showed how investors put more money into the stock market after the market has done well and then take money out of the market after the market has done poorly.
That means many investors are essentially buying high and selling low, the exact opposite of what you want to do. Investors as a whole would be far better off if they just held for the long term. The hard part is having the temperament and emotional stamina to do so.
While we always suggest a buy-to-hold strategy, a buy-and-forget strategy may be better. Last year, investor James O'Shaughnessy told a story about how "Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was ... they were the accounts of people who forgot they had an account at Fidelity."
While you don't need to forget your account, a simple buy-and-hold strategy can do wonders for you.
Dan Caplinger: One of the biggest mistakes that investors make is not taking into account the huge impact that investing expenses and trading costs have on their overall finances. Because Wall Street deals in hundreds of a percentage point, it's easy to think that costs are a trivial drain on your savings. But over the course of your lifetime, even modest expenses can add up to huge amounts of money.
Overall, Americans paid an estimated $600 billion in financial services fees over the last year, according to an analysis by fee-tracking company FeeX, with the typical American household paying $155,000 in investment expenses during their lives. The most prevalent is the mutual fund expense ratio, which for actively managed funds can cost you 1% or more of your investment every single year. Early in your investing career, having little money makes those fees seem negligible. But by the time you've saved up $100,000, fees of $1,000 annually represent a big drag, and by the time you retire a millionaire, paying $10,000 or more every single year leads to a serious drain on your retirement lifestyle.
The best solution is to find low-cost ways to invest. Even ETFs with rock-bottom expense ratios of 0.1% cost a millionaire $1,000 per year, but that's a much smaller burden than most pay.
: In investing, it pays to be a cynic. The best questions always start with "why?"
Ask yourself why your financial advisor recommends a particular investment, be it a mutual fund or an annuity. Is it because they earn a big commission for making the sale? And when it comes to individual stocks, ask similar questions. Why is a business's management team so concerned about sales, when profits are what really matter?
The cold but honest truth is that there are a lot of bad incentives in finance. Financial advisors often hawk bad investments to earn 10% commissions on the sale. Likewise, studies have shown that the majority of America's largest 1500 companies pay their executives based on factors that do not deliver returns for shareholders. Don't take cynicism too far, though -- a few bad apples don't make for a bad orchard.
The most fatal mistake you can ever make in investing is to assume that someone will act against their self-interest. Success relies on other people -- from advisors to corporate management teams -- to make decisions on your behalf to grow your wealth. Make certain that what's good for them is good for you, too.
The article 3 Common Mistakes That Cost Investors Dearly originally appeared on Fool.com.
Dan Caplinger has no position in any stocks mentioned. Dan Dzombak has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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