subject: What Is The Most Common Investing Mistake? [print this page] What Is The Most Common Investing Mistake?
#1 Investor Mistake: Being a Headline Investor Buying when the headlines are encouraging. Selling when the headlines are discouraging.Also known as buying high and selling low.
A recent newspaper article laid out a pitch for buying shares in real estate investment trusts (REITS). The newspaper story began with 3 reasons why you should own REITS followed by why REITS are different than direct real-estate ownership. The author then went on to justify why the timing was right for a REIT rebound followed by a call to action: "If you're a prudent investor, this could be the right time to consider adding REITS to an investment portfolio."
This all sounded very sensible and made for a pretty compelling case at least until you realize that REITS are up ~19% as 9/12/2010, the date which the article was released. In addition, REITS were up ~75% from their lows in 2009 and have been one of the best performing asset classes for the last 2 years. Here is one more example of the media beating the drum long after the party had started and the stock market not matching the publics' perception. After all, isn't real-estate just horrible right now?
But unfortunately most investors do not know how REITS have performed. Rather, most people really only follow the headlines which leads them to the biggest mistake investors make: Headline investing (investing when the headlines are good) which tends to be inversely related to expected return.
When you hear statements such as; "why buy stocks when unemployment is so high" or "I want to have cash since I don't see the economy going anywhere" or "I don't want to own REITs since I don't see anyone buying homes and foreclosures are everywhere"; then you have just witnessed the greatest mistake investors (and the media) make; not understanding that expected returns, i.e. market risk premiums, do not work in lockstep with today's headlines. Quite the opposite actually, they usually work countercyclical.
At Investor Solutions, we believe a properly allocated and diversified portfolio should always include REITs. Not just when the headlines are reporting good news or when you are feeling comfortable since by then you'll no doubt be late, missing out on a significant part of the upside. Headline investing leads to buying when the headlines are encouraging and selling when the headlines are discouraging, also known as buying high and selling low. Don't be a headline investor, be a smart investor and have a well diversified portfolio that allows you toparticipate in market returns long before you read about it in the headlines.
