When you rate yourself on your exchange traded fund (ETF) investing prowess, if you’re like most people, you may believe that you’re above average. But the truth is that most investors are average. If you’re looking to move up a notch, read on.
On average, many investors think they are good or pretty good at investing – the same way most people believe they’re better drivers than others on the road. We can’t all be that great, though, or there would be no accidents.
What does the “average investor” do that keeps him or her from being better than the rest. Mike at Personal Finance has three things you do – if you’re average – that may be holding you back (and there’s a fourth one from us):
- Frequent trades and jitters: You sell, get out, and then don’t get back in and miss rallies. How can you stop that? Recognize that emotional decision-making is hurting you and have a strategy instead. A simple one we recommend is trend following – getting in when an ETF is above its 200-day moving average and selling when it’s below will have you in for potential long-term uptrends and limit your downside risk. [How to Follow Trends.]
- Buying a stock or ETF because you love the product: You take positions in funds because you like the companies inside them. The example Mike uses – buying Microsoft stock because you like the Xbox – may not be a strategy that will earn long-term rewards. While it’s fine to own one or two stocks or ETFs you “like,” look for areas that are in uptrends – especially ones that aren’t making big headlines. [4 Big Benefits of ETFs.]
- Paying too much in fees: You don’t look at expense ratios. You have no idea what your commission is, and you’re making frequent trades that are eating into your returns. Big management fees and frequent trades are principal eaters. This is more reason to sit back and invest over the long term, and let some money and time get accumulated. Following a sound buy and sell strategy will have you buying and selling only when you have to, instead of on whims. As for expense ratios, do some quick cost comparison to make sure you’re getting the best deal. [8 Investing Lessons to Heed.]
- Keep it simple: You have a complex strategy that sometimes even you can’t stick to. Studies have shown it: the more conv0luted a strategy, the less likely it is that you’re going to follow it. It might be the best strategy in the world, but if you’re not using it, how is it helping? Simplify. [4 Reasons to Keep It Simple.]
For more stories about trend following, visit our trend following category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.