Topic: How To Invest

Three mistakes investors make in times of market turbulence

Although stock markets have rebounded lately, they remain sharply lower than their 2008 highs. Likewise, the economy has shown some signs of life, but it remains in recession.

In these times of market turbulence, it’s easy for investors to panic and make mistakes. Here are three common ones:

1. Overanalyzing

The media is full of economic statistics and line-by-line analyses of the economic policies of the Canadian and U.S. governments. You may feel tempted to try to figure out what the economy will do next, and invest accordingly. But economic forecasting is hard enough. When you try to forecast market trends based on economic forecasts, you are virtually certain to fail. As Peter Lynch (the world’s top mutual-fund manager from the 1970s through the early 1990s) wrote, if you spend 12 minutes a year worrying about the economy, you’ve wasted 10 minutes.

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Our general view is that today’s main economic risk is the return of the stagflation of the late 1970s, with rising inflation and struggling economic growth. That possibility helps explain the recent market turbulence, and why today’s investor mood, while better than it was during the height of the market downturn, remains pessimistic. But as we’ve seen over the past two months, the situation can change quickly, and if interest rates stay low, the market can continue to climb during an extended period of weak economic conditions.

Investors should resist the urge to overanalyze and try to predict the future. If the situation continues to rapidly change, or if market turbulence increases, you could find yourself stuck with costly and unprofitable investments in your portfolio.

2. Refusing to make changes

The second easy mistake is to throw up your hands and refuse to consider changes in your portfolio. Although you can’t predict the market or economy with any consistency, you can definitely choose which stocks are best suited to your portfolio, regardless of market turbulence. You can also update your choices as new information becomes available. Even if we recommend all your stocks as buys, you still need to consider how appropriate your choices are for you as an individual and to your portfolio as a whole.

On the other hand, if your portfolio consists of too many stocks we see as “holds” or, worse, stocks that are merely “okay to hold,” you run the risk of suffering steep losses, especially during periods of market turbulence.

3. Taking on heavy risk

Many investors do this in hopes of quickly reversing the losses they experienced during the market turbulence of the past few months. It’s a natural temptation in a situation like today’s.

Lately, you may have noticed a lot of ads for courses in online, short-term stock trading or foreign-exchange trading. The promoters are aiming their pitch at inexperienced investors who have suffered heavy losses. These investors may be inclined to follow the example of desperate gamblers who bet their last few dollars on a handful of lottery tickets, or a long shot at the track or the casino.

That’s a particularly wasteful example to follow right now, when so many well-established stocks trade at low multiples of earnings and offer high dividend yields.

Aggressive holdings can play a role in most investors’ portfolios – in reasonable amounts. Look to our Stock Pickers Digest newsletter for the part of your portfolio that you devote to more aggressive selections. But we continue to feel that you are better off keeping the bulk of your investments in high-quality stocks we rate as conservative.