No one knows for sure, of course. Even a modern-day Nostradamus couldn't tell us what's going to happen tomorrow. But no matter what, avoiding these six costly investment mistakes will help you to keep your head above today's troubled waters.
Mistake No. 1: Panicking over market fluctuations
"Fluctuations in the market are a natural part of our economic cycle," says Stacy Francis, Certified Financial Planner and founder of Francis Financial in New York. "When the market is in a downturn, it may seem logical to cash out and go home, but before you do that you may want to think about your long-term goals for that money."
Market downturns, even recessions, are relatively common occurrences in a free economy. A recession is defined as a decline in Gross Domestic Product, or GDP, for at least two consecutive quarters, making it rather easy for us to slip into one. But they have become shorter duration and less severe than they were in the past.
According to studies by Ned Davis Research, since World War II, the average expansion in our economy has lasted 57 months, while the average recession has lasted 10 months. In the past 20 years, according to the study, we haven't had a recession last longer than eight months.
All of this suggests the rules of the game of profitable investing remain pretty much the same. During the current bumpy ride, investor concerns are focused on such things as the effects of the subprime mortgage crisis, the price of oil and the threat of a recession. While any of these may seem of formidable proportion, they are probably no worse than the concerns that bothered investors in the 1960s or the 1980s, or any other period.
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"Many people sell low and buy high because emotion drives their investment decisions," says Lisa Featherngill, CPA/PFS, member American Institute of Certified Public Accountants. "Remember, you haven't lost money until you actually sell the security.
"If you decide to sell, buy something else right away. Studies have shown that your investment returns will suffer dramatically if you miss the best days of the market. Nobody knows when the best days will occur, so stay invested."
In short, investing for a financially healthy retirement still calls for the same kind of common-sense approach that has worked so well in the past. Most experts predict that the long-term future will most likely mirror the long-term past. That is, a steady pattern of economic growth with periods of expansions, recessions and downturns in the market.
Mistake No. 2: Reacting to daily economic reports
"In an effort to sell newspapers and air time, the media trains investors to look out for the next economic number of the day," says Jordan Kimmel, managing director at Magnet Investment Group in Randolph, N.J. "Whether it's employment numbers, capacity utilization or inflation statistics, there is always a number of the day to tempt investors into overreacting. In reality it is nonsensical to react to daily economic reports. No investment strategy is better than identifying superior companies and holding them while letting your money compound over time."
Mistake No. 3: Turning off your buying during a downturn
Some of the world's most successful investors made their fortunes by buying when everyone else was selling. But that's not easy to do. Investing steadily during market downturns may be too much of a psychological adventure for most of us, but there is a system that enables almost anyone to take advantage of those tempting buying opportunities. It's called dollar-cost averaging.
"Dollar-cost averaging calls for spending a fixed dollar amount each month or quarter on a specific investment or part of a portfolio, regardless of the ups and downs of the share prices," says Francis. "By following this pattern consistently, you will purchase more shares when prices are low and fewer shares when prices are high."
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