“People learn to work for money…but they never learn to make money work for them.” -Robert Kiyosaki
Horatio Alger is dead and so is his economic philosophy. The great American dream of building a business, working hard and getting rich is a myth. Sure there are a few techno-geeks out there who may do it, but do you have any idea how many aspiring Mark Zuckerbergs are out there who fail? Neither do I, but it’s huge. So the great American dream has morphed from Horatio Alger to buying Powerball tickets. You can’t get rich quick, so get more basic. 80% of Americans are not confident they have enough money to retire. Think smaller and avoid mistakes and misconceptions like:
Not having an investment plan.
You need to evaluate your goals and objectives, consider what the risks are, develop a strategy and measure your progress. This is not rocket science; even the math.
Misjudging your time horizon.
If you are 50, make $46,236.00 a year (the average for a household according to 2015 US Census data), have $2,000.00 in savings and $6,000.00 in an IRA, no company pension AND you want to retire at 62 and travel the country, forget it! There is no way with those demographics that you can make that goal. This is not a Pane Webber commercial (besides, PW is gone). You’ll have to work until you croak, and as for travel, you’ll be lucky if they bury you in KayCee, WY.
Overlooking the impact of inflation.
Inflation–the silent killer. If you have all your hard-saved in cash paying 1%, you’re losing an average of 2% a year to the concept of just trying to keep up with the rising cost of everything else. Cash is a short-term stopgap, not a long-term investment allocation.
Putting all your eggs in one basket and then eating the chicken.
Sure, diversification is over-rated and only works until you actually need it, but still, buying only one stock is like buying only one cow and hoping it grows to 62,500 pounds. Keep emotions out of your investing strategy. You don’t put your whole IRA in Disney stock because you love Space Mountain. Of course, if you want to go to Disney World and ride Space Mountain, you’ll have to skip this year’s IRA deposit. Emotion is the enemy of success.
Over-reacting to short-term volatility.
All markets go up and down, except maybe the farmer’s market. You have to keep your gut in check and not bail out when security prices are going down. That’s the time to buy, not sell. You buy stocks when the Stock Market is going down. When it goes up (hopefully higher than when you bought in), then sell. Will Rogers said, “If you want to invest, buy some stock and when it goes up, sell it. Of course, if it don’t go up, don’t buy it.”
Misinterpreting past performance.
Don’t let the past price history influence your future investment decisions. The only prices you need to know are the current price and the future selling price (let me know if you find a way to know that with certainty in advance). Past performance is an unreliable predictor of future performance. Consistency, process and discipline are more important than recent performance. Specifically: don’t buy last week’s winners, don’t buy last month’s winners, don’t buy last year’s winners. In fact buying past winners because they were past winners is like betting on Savvy Shields (Miss Arkansas, August, 2016) to win the Miss America contest again in 2017. My motivational speaker buddy, Nick Murray said it best: “She don’t win twice.”
If you’ve already made these mistakes, don’t repeat them. It’s never too late or too early to begin investing. If you want to do your 6-year old a favor, forego the latest PlayStation and buy the kid a savings bond. She’ll thank you later. That is, if she’s still speaking to you.
John Lohr can be reached at john@somebodyelsesmoney.com