In my long career in finance and investing, I have regularly witnessed a number of key mistakes made by investors over and over again. These errors cause them to lose money and seriously erode their prospects of achieving their goals and investing success. By recognizing these costly mistakes and understanding how to avoid them, there is a far greater chance that investors will find success and create considerable wealth.
Now what?
Firstly, a major wealth-eroding mistake commonly committed by investors is panicking and making rash investment decisions based on the latest sensational headlines.
This was an error commonly committed during the Global Financial Crisis when several major U.S. banks came to the brink of collapse.
As a result, investors in financials stampeded for the exits, fearful that the contagion would move like wildfire through Canada’s banks, causing them to liquidate their holdings in high-quality stocks such as Toronto-Dominion Bank (TSX:TD)(NYSE:TD). By the height of the crisis in early 2009, Toronto-Dominion’s share price had halved. Now, eight years later, its price has more than tripled, giving investors a hefty 295% return when dividends are included.
Unlike its larger U.S. peers, it is essentially a retail and commercial bank, which makes it far easier to understand than banks with significant trading and investment banking operations. Toronto-Dominion’s growth prospects remain strong because it is the 10th largest retail bank in the U.S., which is the world’s largest economy and one of the largest financial services markets.
Secondly, investors forget that while markets are cyclical and volatile in nature over the short to medium term, they only trend upwards over the long term.
Famed investor Warren Buffett once explained that this occurs because the economy continues to expand with improvements in productivity and innovation stimulating growth.
Investors must recognize that this means one of their greatest allies is time, and that they should not sell out of fear in a falling market. By selling, all they do is turn paper losses into real losses, when, in many cases, those stocks would have recovered and generated profits. This becomes clear when examining the performance of the S&P/TSX Composite Index, which has doubled in value over the last 15 years, despite the Global Financial Crisis and a myriad of other, lesser market crunches.
Had an investor over that period ignored the bad news and retained their investment in a high-quality stock, like Canadian National Railway Company (TSX:CNR)(NYSE:CNI), they would have turned a $10,000 investment into an astonishing $116,781 if they reinvested the dividends.
Finally, one of the greatest errors committed by many investors is failing to establish a clear investment strategy and possessing the discipline to adhere to it.
By doing so, investors can better understand which stocks are appropriate for portfolio while avoiding wealth-destroying behaviour like trading too frequently, speculating on the next hot stock, and chasing losses.
So what?
There is certainly no guarantee of success when it comes to investing. However, if investors avoid the pitfalls discussed and follow the advice provided, they can substantially boost their chances of success and achieving their financial goals.
