3 Mistakes Investors Make

I'm constantly amazed at the power of propaganda and advertising. The return of the stock market over the last 10 years as measured by the S&P 500, is negative. Yes, you heard me right. Negative. As in less than zero.

Yet, there's not a day that goes by that I don't read a mutual fund manager or financial advisor saying “Don't sell your investments now, because all you'll do is lock in the loss!” OK, but why didn't you tell me to sell in December 2007, when I could have locked in some profits???

The reason is that mutual fund companies and those who sell them have a vested interest in you being in mutual funds. All the time. Good and bad markets. That's why they always advertise to be a “long-term” investor. I don't know about you, but to me 10 years IS a long-term.

The problem is we haven't been in a “buy and hold” market since 2000. And this secular bear market is likely to last another 10 years. To that end, here are 3 mistakes investors make and some possible solutions:

Mistake #1 – Being in the market all the time

It goes without saying that when investing, sometimes we should be on “Offense” and sometimes we should play “Defense”. This means there are times when we should be fully invested to build the portfolio and grow our wealth. But there are also times when we should either protect the profits we have or simply sit on the sidelines and wait. Remember, avoiding big losses is critical for consistent profits. There's always more opportunity, but not always more money to invest (especially if you're retired!).

Mistake #2 – Not knowing where you'll get out

We've all heard the saying “Buy low, sell high” and it's the only way to make profits in the market. However, the reality of investing is that sometimes you buy an investment “low” and it goes “lower”. It's important to your returns (and your emotions) to not let a small loss become a huge loss. Therefore, always know where your “ouch” point is on any investment. This is where you'll sell it and cut your losses. It could be a dollar amount (-$1,000) or a percentage (-5%). If an investment does go up enough, make your exit point higher than where you bought it. That way you'll at least guarantee a small profit. And remember, if you do sell an investment at your exit point, refer to Mistake #1.

Mistake #3 – Investing in mutual funds

It's not that I hate mutual funds, it's just that they are terrible for risk-management. You can't put a stop-loss order in for a mutual fund. But there are investments similar to mutual funds that are good for risk-management. They're called Exchange Traded Funds and they've been around since 1993. They are basically a basket of stocks like a mutual fund. But they trade on an exchange like a stock. This allows special orders types, like stop-loss orders, trailing stops (where the stop goes up if the ETF does, but never goes down), and others. Plus there's a whole line of ETFs which are designed to go up when the markets go down! Talk about a way to protect your profits!!!

Drop your mutual funds and replace them with a better choice like ETFs.


Financial pundits are always talking about diversifying your investments. But how about diversifying your strategies. “Buy and hold” is only one of several ways to invest. And many of the others have been profitable, even in this bear market. I hope all investors will review their strategies and see how they've done over the last 10 years. It can be very eye opening. Don't let the next decade pass without moving ahead.

And don't make the same mistakes again.

-----Tommy Sikes is a fee-only money manager based in Hillsborough, NC. He manages market risk for high net worth families who want to accumulate and preserve wealth. He can be reached at 919-644-0090 or by email: tommy@tsfinancial.info . His website is www.tsfinancial.info .