After some widespread panic among investors in early August, Suze Orman took to her podcast ‘Women and Money’ to tackle some of the biggest mistakes investors make, especially when navigating volatile markets and encountering high emotions.
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The first mistake: “You look at what you had, not at what you have,” says Orman. She emphasizes that focusing on past profits instead of focusing on the total profits of your original investment can make you feel like you’ve lost money when that’s simply not the case.
For example, if you bought a stock at $30 per share and it rose to $110, it’s easy to feel like you’ve hit the jackpot. But if that stock drops to $90, it can feel like you’ve lost money even though your original investment has tripled.
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“A stock only makes you money once you sell it,” says Orman. Holding on to unrealistic expectations about what the stock market was worth at its peak can cloud your judgment and encourage fear-based decisions rather than rational ones.
The second mistake Orman highlights: no the dollar cost average. This is an investment strategy in which you invest a fixed amount at regular intervals, regardless of the share price. According to Orman, many investors make the mistake of investing all their money at once, missing out on opportunities to buy shares at a lower price.
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To illustrate the benefits of dollar-cost averaging, Orman provides a hypothetical scenario involving two investors. One invests a lump sum of $12,000 in a stock at $10 per share, purchasing 1,200 shares. The other spreads the $12,000 over a year and buys more shares as the price falls. By the end of the year, the second investor gets more shares and profits, while the first investor only breaks even. This strategy helps soften the impact of market volatility and allows investors to take advantage of lower prices.
Dollar cost averaging (DCA) is a common strategy that many financial advisors recommend. Morgan Stanley’s experts generally support and recommend a DCA strategy, but they do advocate lump-sum investments when an investor has a significant amount of capital to invest at once.
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According to research from the Financial Planning Association and Vanguard, investors who use dollar cost averaging typically see significant investment growth, but those who invest lump sums see higher profits about two-thirds of the time. However, because it is impossible to predict market declines, dollar cost averaging offers better returns over time with less risk in the 33% of cases where lump sum investing can fail.
As a parting note, Orman warns against letting fear dictate your investment decisions. If you know you have invested in good quality stocks with solid management, don’t let temporary downturns deter you from selling prematurely. “If you come from a place of fear, I promise you you will make the biggest mistake of your life,” she says.
While proven strategies exist, your investment strategy should be tailored to your unique circumstances and long-term financial goals. Talk to one financial advisor can help you align your strategic decisions with those objectives.
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This article ‘You look at what you had, not at what you have’ and other investing mistakes Suze Orman says you make originally appeared on Benzinga.com
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