Q: Are there any rules of thumb you can give to help investors avoid mistakes?
A: Well, there's no end to the mistakes people can make, but there are a few rules of the road that can help you avoid many of them.
One of the worst mistakes that investors make is selling stocks in a panic when the market drops, thus choosing to realize losses. Then, during the ensuing recovery, when stocks are rising, these investors often sit on the sidelines like a deer in headlights, missing out on gains. By the time they finally get hack into the market, prices are often much higher. After buying back in, these investors are now all set to repeat this all-too-predictable vicious cycle when the market declines again.
You can avoid these and other investing mistakes if you keep in mind some key lessons, including:
• At its core, investing isn't terribly complicated.
As Warren Buffett famously said successful investing is like dieting— simple, but not easy, because it requires discipline.
Yet investors often overlook the importance of discipline and fail to follow through. They set up an investing plan and then abandon it by chasing hot investments that often become tomorrow's dogs. And they make things worse by focusing on useless market forecasts, which are nothing more than dangerous speculation. All the noise about what markets might do over the next couple quarters is useless, as shown by financial science. Disciplined investors who develop a wise plan and stick with it—while ignoring the noise—are the ones who ultimately enjoy financial freedom.