6 common mistakes investors make when markets tank

6 mistakes investors make when markets tank

Avoid these common traps as North American markets plunge

(moodboard/Getty Images)

(moodboard/Getty Images)

Investors make common mistakes at the best of times, but the risk of committing one of these six faux pas increases when stock markets swing and fear sets in, says Allan Small, senior investment adviser at Allan Small Financial Group a division of HollisWealth. His advice in times like these is simple: “Take advantage of the buying opportunities only to rebalance your already good quality, balanced portfolio.” This of course assumes you have a solid portfolio with just the right target mix of fixed income and equities to begin with. Whatever you do, avoid these missteps featured in Small’s latest book, Buy Low and Sell High: How to Profit When Investors are Scared.

1. Trying to time the market

It’s very difficult to figure out where the bottom of the market is in order to buy stocks at the lowest possible price and likewise it’s very difficult to sell at the top, says Small. Buy stocks for their underlying fundamentals—not their sale price—and hold it for the long-term. “If it is a good quality investment, it will be one of the first to rise again when the markets get better.”

2. Leaning too heavily on fixed income

When equities take a beating, people tend to get nervous and their knee-jerk reaction is to load up on GICs and bonds. While it’ll make you feel better in the short-term, it could and probably will come back to haunt you in the long-term. “When you factor in inflation and possibly taxes, you may wind up with a negative real rate of return,” says Small. Your asset allocation should be based on your risk tolerance, not how the markets have fared in the last day, week or even year.

3. Flocking to gold as a safe haven

When the stock market goes down, it’s not uncommon to see the price of gold go up. That’s because investors also turn to gold when outlooks sour. “For me, gold is anything but a safe haven,” says Small. Gold can fluctuate $50-$75 per ounce in a single day, it’s extremely volatile. “To me a safe haven is government bonds or the U.S. currency.”

4. Trusting talking heads on TV

Fund managers get invited to appear on business news programs all the time but usually they take too narrow an approach, only talking about specific sectors or products they work with. “You have to take what they say with a grain of salt, they might have an underlying agenda,” says Small. It’s not uncommon for money managers to “talk up their book” or what they are buying. “If other people follow suit, it raises the value of their portfolios.”

5. Chasing the hot investment

“You can’t always chase momentum stocks because at some point someone’s left holding the door and you don’t want to be that person,” says Small. When it comes to Canadian banks for instance, more times than not, the winner this year will be last year’s lagger. “What you want to do is figure out where the smart money is going, not where it has been.”

6. Planning to make money quickly

“Investing is a marathon, not a sprint,” says Small. Loading up on oil stocks when prices are low for instance in the hopes of cashing out when and if they climb back up is a risky endeavour. Even expert value investor Norm Rothery is hesitant to dive headlong into such volatile investment pools. “Oil is only part of a good quality portfolio. The key is to stay balanced, stay diversified,” says Small. “That’s the way to weather tough times.”

This story was originally published on Dec. 15, 2014.