3 Most Common Mistakes in Regular Fund Investing

Unrealistic Expectations About Returns

Usually, in regular investing, the first years are the hardest because it feels like the returns you’re getting are not that spectacular. The thing is that, honestly, they aren’t really supposed to be.

In regular, long-term investing compounding takes a while to get going. Compounding returns are achieved when the returns themselves start to accumulate returns. 

Some investors are expecting exponential returns way too soon. This is especially common with investors who follow the markets, and even worse, other investors closely.

It’s quite hard to stick with your long-term investment plan when traders and other short-term investors are making huge gains.

You should always remember that as a long-term investor you’re playing a different game in a different time frame. Your game is to accumulate wealth during a longer period in a slower but much steadier manner.

It’s also worth realizing that when you invest in a widely diversified index fund, you will most likely receive the average market return of 7­–10% per year.  

If you expect returns that are not achievable with your defined risk level and investment plan, you’re likely heading for a fall.

When expectations are too high, you start to question yourself and your investment plan. This leads to chasing extra returns from hot stocks that have already gone up in price.

More often than not, the greatest profits are already gone, and you’re left chasing the next hot stock. And the next. And the next.

Over time you’ll notice you’d been better off with the initial regular, long-term investing plan. In regular investing there’s rarely anything wrong with the plan itself, it’s just the expectations that are set too high.

Trying to Time Your Buys

One of the things I’ve most often come across is the need for regular investors to try and time their purchases. 

When you invest a certain amount per month, you don’t need to worry about the market going up or down. You just keep going month after month, year after year.

This is deceptively simple because investors usually tend to follow the market movements and make decisions accordingly.

When the stock market is going down, the usual reaction is to stop investing and start again after stocks are going up. What happens here is the exact opposite of what investors usually want – buying more when prices are high and buying less when prices are low.

It feels logical to invest less in something that is going down in price. This is true if the price will most likely not rise again.

With regular investing in, let’s say in S&P 500 index, it is quite likely that the index will go up in the long term. This is when it makes a lot more sense to buy more when it’s cheaper.

The worst thing that you can do is to sell everything when markets are down, take the highly diminished returns, start investing again when markets have gone up and repeat ad infinitum. It defies all logic but is one of the most common mistakes there is.

Sometimes investors believe they can predict the market movements and time their buys accordingly. When you begin to feel confident about your predicting abilities, you might be suffering from overconfidence.

What I would recommend is to make regular investing as automated as possible. The less you have to think about it, the more likely you succeed.

The logic behind regular fund investing is sound and the process itself simple. What’s hard is to maintain it for years and years.

Not Keeping It Regular 

The whole idea of long-term fund investing is to maintain a regular investing schedule. This is when dollar cost averaging and compounding returns work best.

Occasionally, the idea of regular investing tends to be forgotten, and the once regular becomes irregular.

Sometimes it’s necessary to put investments on ice for a month or two. This is usually because of some unforeseen circumstance, like a medical bill or a car breaking down.

Taking a few months off is not a big deal in the long run. What is a big deal is to take regular breaks from investing to spend your cash on unnecessary purchases.

The main point in monthly-based investing is that you eliminate timing risk entirely. The less frequent your purchases are, the more timing risk you take.

Also, if you take frequent breaks from investing to spend your money otherwise, you risk stopping investing completely. Infrequent investing will not get you the results you’re after, which often leads to disappointment and quitting entirely.

Cashing Out When You Don’t Have to 

Another common mistake is to sell when the profits are just starting to accumulate. Especially with new investors, the loss aversion is so strong that sometimes they feel more comfortable selling to avoid temporarily losing whatever profits there are.

The problem is that making regular sales destroys compounding returns every time it’s done.  Not to mention the transaction costs and taxes that diminish the eventual return you get.

The idea of a long-term, regular fund investing plan is to make monthly-based purchases, keep what you’ve bought, and let compounding do its work. This does not include regular selling.

Using Invested Money to Buy Things 

Some investors wish to invest for a certain period in order to purchase something specific with the invested capital. This is the most expensive form of money.

You should never use money from your investments to buy goods, because you not only spend the money you’ve saved, but you also spend all the money you would’ve gained in profit over the coming years.

Also, there is the issue of time and risk. If you invest for a couple of years to save for something specific, your risk level should be quite minimal.

Stock investments always carry a certain amount of risk. You should be aware of the fact that if you intend to invest for a year or two and then cash out, stocks probably aren’t the best choice. 

There are a lot of other finance options for making purchases, invested capital should not be one of them.

Summary 

What we’re dealing with here is an exceptionally simple form of investing. The best part is that it’s suitable for everyone. I believe that even the most hardcore day traders should invest a portion of their assets regularly in index funds.

In regular investing, the worst enemy is often the investor himself.

The thing with the human mind is that whenever things are too simple, it starts to create problems. Regular investing is probably the dullest way to make profits. Therefore, the mind starts to tell us we should be doing more.

The way I see it, boring is good. If you feel the need for some extra excitement, it’s wiser to set aside a certain amount of money that’s just for speculating.

This should preferably be around 5-10% of your total assets. This way you can limit your losses to a manageable level.

So, to summarize, the formula of successful regular investing would be:

o  Keep your expectations realistic and be patient.

o  Don’t try to time the market.

o  Invest regularly every month for a long time.

o   Don’t sell unless it’s absolutely necessary.

If you manage to follow these steps, you will most likely achieve more than satisfying returns over time. Simple as that.

And as always, remember not to make short-term decisions when playing a long-term game.