How To Avoid It: The Biggest Mistake of the Everyday Investor
“Be fearful when others are greedy and greedy when others are fearful”
Back in the late 90’s, it seemed like a great time to be investing in the stock market, especially with technology companies. It was the dotcom boom, and internet companies were going through IPO’s and selling their stock as prices soared. It seemed like everyone was excited about making money in the tech sector. Unfortunately, by 2001 the dotcom bubble had popped, and many of these tech companies were going bankrupt, and there stock was plummeting by 50% or more. Many of the people who were investing their money in late 90’s were losing millions in 2000-2001. I was only in middle school at the time, but it was my first experience with hearing about what it was like to be in a recession.
Flash forward to 2006-2007, now real estate prices were at an all-time high, and everyone seemed to be buying up second homes, rental properties and condos, and with interest rates so low it was easy to take on more than one mortgage to finance the purchase. I remember back in high school my parents talking about how our house had gone up 50% in value in just a few short years, and everyone was excited about the money they were making on their homes. However, when the financial crisis hit in 2008, much of which was caused by inflated real estate prices and bad mortgages holding up the value, the housing bubble popped and real estate prices lost all of their gains of the past few years and many people were unable to pay back their now expensive mortgages. Being in high school, I was more aware of what was going on at the time, and though my family was not greatly affected by this crisis, I still remember it being a hard time for many of the people in our community.
When a crisis like this hits the economy it’s never a pretty picture for the majority of the public. However, you can avoid being caught up in situation like this if you avoid the biggest mistake of the everyday investor: Using emotions to make an investing decision.
How To Avoid It
Making a decision to invest in anything, whether it be the stock market, real estate or even in starting a new business, should not be taken lightly. It’s a decision that involves doing your research, talking to experts and some careful deliberation, not jumping into it because you’re excited about making money. You might even find that after going through this process, you have no interest in making the investment at all, or you find out that you would rather put your money to another use. Either way, the best approach is to take your time and avoid making a decision based on initial excitement.
If you are hearing on the news or from friends all about the latest stock or real estate market that is booming, then it is also best not to follow the majority. Pay attention to what other people are doing because usually once everyone else has already bought into the latest investment, the best time has probably passed. When investing your money, you want to buy when prices are low and sell when prices are high, but when decisions are made based on emotions, people tend to buy when prices are high due to excitement and then once prices start to fall they sell out of panic. Take a look around and look for a deal. If you bought real estate in 2009 right after the financial crisis, you would have gotten a great deal on a new house!
What You Can Do Just In Case
No matter what market you are involved in, whether it be stocks, bonds, real estate, energy or other, they all go through ups and downs over the course of time, so it’s inevitable that even if we do our research and carefully make decisions we will probably be caught in a recession at some point. The best way to protect yourself it is diversify your investments and hold through the downturns. If you invest in stocks, also invest in bonds. If you have a stable job, maybe start a small business on the side in case you get laid off. It always pays to not put all your eggs in one basket.
If your stock portfolio lost 30% in 2008, and you didn’t sell anything at the time, you would now be up 50% from before the financial crisis and made back all of your losses. So if you ever do catch yourself in a market downturn with one of your investments, especially the stock market, it pays to try to hold through the low points because it is almost certain that prices will go back up if you are patient. Whenever you feel panic or excitement, stop and take breath, look around at what is really happening, then use logic and reasoning to make the best decision.
Would love to hear your thoughts on how you approach making investment decisions, so leave a comment or send me an email!