Once again, it’s that time of year, when every Wall Street bank and investment firm comes out with their predictions for the coming year. As I say every year, it’s important to keep in mind that these “predictions” are nothing more than educated guesses, wishful thinking, and marketing. They should not be viewed as investment advice and repositioning your portfolio solely based on anyone’s predictions is generally a bad decision.
Last year, I made my own set of predictions that focused on things that never change, like ignoring the noise, investor psychology, and making emotional decisions. This year, in lieu of “predictions” my firm, ParkBridge Wealth Management, has put out a list of seven mistakes to avoid in the coming year. After all, a major component of successful investing is averting the big missteps.
Avoid believing too strongly in the status quo: The concept known as “recency bias” is the tendency to place too much emphasis on experiences that are the newest in your memory, even if they are not the most relevant or reliable. In the investing world, this may mean assuming that 2023’s winning technology stocks will be the best performing sector in 2024. Alternatively, it may be an irrational fear of inflation or further increase in interest rates because those were the major investor fears last year. It’s important to be mindful that the latest news headlines and market performance won’t necessarily carry over indefinitely into the future. You should be prepared for different winners and risks in the market in the coming year.
Avoid loss aversion: Humans tend to experience the pain of losses more intensely than they feel the pleasure of gains. I see this throughout the year after any market drop. Given the market’s cyclical nature, drops are normal and expected to occur several times a year. However, even if a client is still in the black, once they see their funds drop below their latest high point, they begin to panic.
It is said that an investor’s “loss aversion” bias has their desire to avoid loss almost three times as powerful as their pursuit of pleasure. Therefore, clients’ emotions tend to get triggered when anything negative occurs. To stay on track to achieve your goals, it’s essential to have systems in place within your finances to avoid the normal human emotion of overreacting when your portfolio inevitably falls in value. There is a high likelihood that your portfolio will drop at some point in 2024. Don’t panic! This is normal. Stick with your strategy and you should be able ride out the temporary market turbulence.
Avoid mixing politics and your portfolio: This is an especially important point with a presidential election coming up in November. There is nothing that triggers people more than politics. I’ve had friends and acquaintances make drastic decisions based on a presidential election. One friend told me he was going to liquidate his investments and leave the country if Obama won the presidency back in 2008. Obama won and my friend left! I know others who liquidated their entire portfolio when Trump won the election in 2016. In both situations, the market skyrocketed while each President was in office. While certain industries may benefit based on who controls Washington, the market doesn’t care who is in office. It will remain resilient over time. The most important thing to remember when it comes to investing and politics is not to mix the two!
Avoid keeping too much money in cash: The yields on money market accounts were extremely attractive in 2023 (over 5% for part of the year). They were a wonderful place to park cash that may be needed for an expense in the not-too-distant future. Remember, though, that these high money market rates will not stay elevated forever. Furthermore, sitting with too much money in cash is a wonderful way to lose buying power due to inflation. If you’d like to build wealth and outpace inflation, it’s imperative to invest in risky assets like stocks. Failure to do so may be detrimental to your finances.
Avoid waiting for more favorable market conditions to purchase a home: Mortgage rates are high and real estate is expensive. This trend may continue for a while or the landscape for first time home purchasers may become more attractive. No one knows. The important thing to keep in mind when buying a home is that the current market conditions should not be the ultimate driver for one’s home purchase. The right time to buy a home is 1) When you are in the market to buy a home. Don’t buy a home if you don’t need more space, don’t know where you want to plant your roots, or just because your friends are buying. 2) When you find a community in which you want to live. Some would argue that the community you choose to live in is even more important than the actual house you buy. 3) When you find a house that satisfies you. Don’t try to find your “dream home.” This is not Hollywood. This is real life. Be practical and realize that no home is perfect, even one that you customize yourself. 4) When you can afford the house. Whether home prices and mortgages are high or not shouldn’t concern you as much as whether you have the down payment and the ongoing cash flow to buy the house you are satisfied with in current market conditions. If you don’t have the finances to make this happen, then you are not in the market to buy a home in the first place. If you meet all these four criteria, then buy a home and don’t wait for more favorable conditions…they may never come!
Avoid abandoning asset classes that have underperformed: At the risk of sounding like a broken record, something I say very often is “always remember that markets move in cycles.” This means when some areas of the market are up, others will be down. Some asset classes may be down for a while, and others may have superior returns for a decade or longer. Every area of the market will have its day in the sun and none of them will outperform forever. This is why it’s so important to stick with investments that have had a rough stretch of returns. This may include value, international, and small company stocks. Staying adequately diversified allows you to maintain exposure to all areas of the market. Doing so will allow you to capitalize on any changing market dynamics.
Avoid “exciting” investments: There is a tendency for people to make investment decisions based on what they deem to be exciting. This is the wrong approach. Excitement is what drives bubbles and the latest investment fad du jour. If you want to increase your probability of financial success, focus on developing a portfolio that is based on your goals, time horizon, and risk tolerance. Then use boring plain vanilla investments to implement the strategy. Whenever someone presents me with an “exciting” opportunity, I always think about the quote by the legendary economist Paul Samuelson who said “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
The recipe for financial success in the New Year is to have a disciplined investing process, ignore the noise, avoid any major missteps, and to stay the course. Now that you know what mistakes to avoid, you should be well positioned for financial success in 2024!
May 2024 be a year of health, wealth, peace, and only good things for you, your family, and all of Am Yisrael!
