With the end of the year in sight this is a good time to look at how well your investments fared over the last 12 months. In theory, your equity portfolio should have performed better than it did last year—the S&P/TSX Composite Index is up about 3.5%, a far cry from the 11% drop in 2011, while the S&P 500 is up about 14%.
Kudos to you if you’ve done at least that well, but many investors will likely find themselves in the red once again. Why? Because investors are prone to making mistakes and evidence suggests they’ve made several errors again this year. Here are five of the biggest investing mistakes of 2012.
Timing the market
It happens every year. Investors think they can find the perfect time to get into the market. They wait for good news to buy and sell the moment things start to look bleak. In other words, they do the opposite of buy low and sell high; they purchase investments at their peak and then sell at the bottom.
It’s easy to understand why people might be hesitant about investing in the stock market. The steady bombardment of doom and gloom stories—such as the dreaded U.S. fiscal cliff or Europe’s ongoing financial crisis—is offsetting even bullish investors. So why should someone want to get into the market, or hold on to their stocks? Well, as we saw this year, despite the dire headlines equities do go up. If you wait for positive news—like strong GDP numbers—you’ll likely be too late to act on it. “Markets act in advance of news,” says Mathieu Paradis, a financial adviser with Raymond James. “If you wait around you’ll miss out.”
Buying bonds instead of equities
Investors continue to be drawn to bonds and out of equities. According to EPFR Global, investors have poured more than $460 billion into bond funds so far this year and pulled almost $70 billion out of equity funds.
While every portfolio should have some bonds, Allan Small, a senior investment advisor with DWM Securities, says this isn’t the time to stock up on fixed-income. A 10-year Government of Canada bond is paying about 1.7%, which is around or even below inflation. That means people are actually losing money in fixed-income, he says.
“Investors think they can go into a bond that’s making 1.7% and they say at least it’s making something,” he says. “But that’s not right. They’re not keeping up to the standard of living or the rate of inflation.”
Avoiding the U.S.
News out the United States seem to be overwhelmingly negative, but that’s not having the affect on the equity markets investors might expect. In fact, the U.S. equity market has made significant gains every year since 2009, save for last year when it was flat.
Small says many Canadians have missed out by sticking close to home. “It’s been a big mistake to stay away from the U.S. and stay in Canada,” he says. It’s more proof that to do well in the markets you need to be diversified. He admits that you “have to have the guts to be able to do it,” but cautious investors shouldn’t confuse the economy with the markets, he says.
Not having a plan
Failing to plan is a common mistake, and Paradis says this year is no different. A lot of people come to him with their money and tell him invest wherever he sees fit. “We don’t do that,” he says. People need to know why they’re investing. If they’re buying a house in two years, they’ll want to take less risk than if they have a 30-year time horizon to retirement, he says.
Small adds that a lot of retirees make the mistake of moving their money into fixed income when many should still keep a portion of their funds in growth stocks. The bonds to equity ratio should be based on goals and what you want to do in life, not age, which has been the norm. “You have to figure out how much money you need to maintain your lifestyle,” he says. “Some people will still be invested until the day they’re no longer here, so you need to take that into consideration.”
Chasing the trend
If the recent gold rush taught us anything it’s that chasing a hot stock tip or trend is a bad idea. Yes gold did shoot up at the start of the year, but it’s been quite volatile since. Still, people love to act on a tip from a friend or co-worker. Investor need to understand what they’re buying before they spend their money, says Small. “People don’t understand how gold works,” he says. “It’s based on other factors than supply and demand.”
Piling into gold wasn’t the only example. We saw some get caught up in the buzz around Facebook when the social media company launched its IPO. Even Apple, which has been a market darling for years, appears to be losing some of its appeal. Investors need to do their due diligence, especially in today’s up and down markets. This ties back into mistake number one, says Small. Buy undervalued stocks and sell when they get expensive, and there’s no way you won’t see big gains in 2013.