After some widespread panic among investors at the beginning of August, Suze Orman took to her "Women and Money" podcast to address some of the biggest mistakes that investors make, particularly as they navigate volatile markets and run on high emotions.
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The first mistake: "You look at what you had, not at what you have," Orman says. She emphasizes that dwelling on past gains rather than focusing on the total gains from your original investment makes you feel like you've lost money, when that's simply not the case.
For example, if you bought a stock at $30 per share and it rose to $110, it's easy to feel like you've hit the jackpot. But when that stock drops to $90, you might feel like you've lost money even though your original investment has tripled.
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"A stock doesn't make you money until you've sold it," Orman states. Holding onto unrealistic expectations about what the stock market was worth at its peak can cloud your judgment and drive fear-based decisions, rather than rational ones.
The second mistake Orman stresses: not dollar cost averaging. This is an investing strategy where you invest a fixed amount of money at regular intervals, regardless of the stock price. Many investors, according to Orman, make the mistake of investing all of their money at once and lose out on opportunities to purchase stocks at a lower price.
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To illustrate the benefits of dollar cost averaging, Orman provides a hypothetical scenario involving two investors. One invests a lump sum of $12,000 in a stock at $10 per share, buying 1,200 shares. The other spreads the $12,000 over a year, purchasing more shares when the price drops. By the end of the year, the second investor ends up with more shares and a profit, while the first investor merely breaks even. This strategy helps mitigate the impact of market volatility and allows investors to take advantage of lower prices.
Dollar cost averaging (DCA) is a common strategy that many financial advisors recommend. The experts at Morgan Stanley generally support and recommend a DCA strategy, however, they do advocate for lump sum investing when an investor has a significant amount of capital to spend at once.
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According to research from Financial Planning Association and Vanguard, investors who use dollar cost averaging generally see significant investment growth, but those who invest lump sums do see higher gains about two-thirds of the time. However, because it's impossible to predict market drops, dollar cost averaging offers better returns over time with less risk in the 33% of cases where lump sum investing can fail.
On a parting note, Orman warns against letting fear dictate your investment decisions. If you know you've invested in good quality stocks with solid management, don't let temporary downturns scare you into selling prematurely. "If you come from a place of fear, I promise you, you will make the biggest mistake of your life," she says.
While there are proven strategies, your investment strategy should be tailored to your unique circumstances and long-term financial goals. Talking to a financial advisor can help you align your strategic decisions with those goals.
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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