We have been through the worst market upset in modern times, and the evidence shows that stock and exchange traded fund (ETF) investors just aren’t learning. Recent research has shown that many are still relying on bad habits and emotions to navigate the stock market.
The S&P 500 is used as a proxy for investors to calculate real-life returns by comparing investors’ earnings to the average investment. The New York Times reports that if you had put money into an S&P 500 index fund 20 years ago and just left it there – no buying, no selling, just investing and forgetting about it – you would have earned (minus fees) about 8%. [Is Successful Investing Luck or Strategy?]
But is that how people are investing? Not so much.
It’s hard to just let your money sit there. Media headlines, our own emotions and financial wizards more often dictate our actions. The good news is that it’s what people have been doing for decades or centuries, even.
Here are a few things you can do to dump the bad behavior:
- Honesty: Admit and own your mistakes. Did you get caught up in the tech bubble in 1999? Real estate in 2006? Did you sell in 2002, late 2007 or early 2008? Looking at past bad decisions will help the future.
- Make a List: Then go through that checklist before you make major investment decisions. It will help you avoid mistakes in investment behavior, too.
- Have Your Strategy: This is so important. Before you ever buy, you should know when you will buy and when you will sell. Don’t leave it to the fates to decide. An easy strategy we use is trend following, using the 200-day moving average. [What a Moving Average Can Tell You.]
- Walk Away: If things aren’t going your way, it’s okay to take a break and sit on the sidelines. But don’t do it too long; you could risk missing out on the next potential long-term uptrend. [How to Navigate a Trendless Market.]
- Look at the Good: Investing doesn’t have to be all about self-flagellation. You’ve made some smart moves, too. Celebrate them. Remember what you did right and try to replicate that again and again until it becomes habit.
For more stories about trend following, visit our trend following category.
Tisha Guerrero contributed to this article.
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.