Groundhog Day is almost here. For most of its history — which, according to some reports, dates back to the first celebration in 1886 or 1887 in Punxsutawney, Pa. — Groundhog Day held little significance for most Americans.
But that changed in 1993 with the release of the movie Groundhog Day, in which a semi-embittered meteorologist, played by Bill Murray, is forced to re-live the same day over and over again. He repeatedly makes poor choices, until he finally learns from his mistakes and is granted the ability to move on with his life. Since the movie came out, the term “Groundhog Day” is often used to refer to a situation in which someone repeats the same mistakes. It’s a phenomenon that happens in many walks of life — including investing.
So, how can you avoid becoming a “Groundhog Day” investor? Here are some suggestions:
• Don’t chase after “hot investments.” Many investors make this same mistake over and over — they hear about a “hot” investment from a friend, relative or television commentator, and they buy it. Too often, though, by the time they purchase this investment, it’s already cooling down. Even more importantly, it just might not be suitable for them. So instead of pursuing “hot” choices, pick those investments that are appropriate for your needs, goals and risk tolerance.
• Don’t over-analyze short-term price fluctuations. Some investors check their portfolios' performance every day, or even several times a day. But if you’re constantly evaluating how your investments are doing over short intervals, you may be tempted to make unwise decisions in response to sudden drops or jumps. You can get a good sense of the progress you’re making toward your goals by checking your portfolio once a month.
• Don’t let fear and greed drive your choices. “Buy low and sell high” is the classic piece of investment advice. But too many investors only buy investments when they’re on the rise and sell them when they’re falling. In other words, they’re doing the opposite of “buy low and sell high” — and they’re being driven by fear and greed. Keep these emotions out of your investment strategy, and you’ll help yourself greatly.
• Don’t maintain unrealistic expectations. Some people consistently put off investing until “later,” figuring they can always catch up by putting away more money during their peak earning years. Don’t make that mistake. To achieve your long-term goals, such as a comfortable retirement, you need to invest early and keep investing, rather than wait for a time in your life when you may suddenly have more money “freed up” for investment purposes. Also, don’t anticipate that you’ll steadily earn a good rate of return on your investments. Although the financial markets have trended up in the long term, we’ve seen many down markets that have lasted for a year or longer. Factor in these fluctuations when estimating the rate of return you’ll need to achieve your goals. For these types of calculations, you may want to work with an experienced financial professional.
These and other “Groundhog Day”-type investment mistakes can be costly. But you can avoid them if you maintain a solid investment strategy, if you’ve got patience and perseverance — and if you stay focused on the long-term horizon.
This article was written by Edward Jones for use by Evans, Edward Jones financial adviser in Richmond Hill.