Don't Treat Investing Like a Hobby
There are several ways a portfolio can truly fail. Luckily, you can avoid many of the pitfalls by simply checking your behavior. First, don't try to time the market. If your plan is to jump out of the stock market before it falls (or even worse, during a crash) and then buy back in when prices reach the bottom, you are setting yourself up to lose a lot of money. Don't do this. No one can predict the market. Stay in for the long run.
Another great way to hobble your portfolio is to change your investing strategy every few months. I see this most often in people who develop a real interest in the markets but don't work in the field. They are curious enough about finance to watch CNBC or Bloomberg and they enjoy reading financial news. It's almost inevitable that they decide to take what they learn and put it to use, turning portfolio management into something of a hobby.
So what's wrong with that?
Usually nothing. Personally, I'm fascinated with finance. I read about the markets all day long and I teach classes about investing throughout the year. I love it when I have students who are as curious about investing as I am, and I'm a huge supporter of people taking responsibility for their own finances. I even started a Meetup group to advance that exact cause, and I'm delighted to say we now have over 2,300 members. So why am I telling you not to treat managing your own portfolio like a hobby?
Because a hobby is something you're supposed to enjoy with relatively low stakes. Many of us are truly passionate about our hobbies. We learn new techniques for our golf swing, new recipes to spice up dinner time, new color schemes for our watercolor paintings. Some folks watch ESPN every day so they have the latest information to manage their fantasy football teams. There are plenty of new ideas to try out and no real downside to experimenting. Investing is different. The decisions you make with your portfolio can have big consequences, so you want to tread lightly. Someone who treats investing like a hobby is susceptible to changing their approach every time they hear a new perspective. One of the talking heads on TV recommends a certain batch of stocks in March, so they buy all those stocks. Then someone else writes an article about a different batch of stocks in May, so they switch into those instead.
Changing the plan too often and too drastically is a terrific way to lose money. The vast majority of professional investors try to minimize big tactical or strategic shifts in portfolios. They know that performance is judged over many years, not a few months. If you have a real passion for learning about investing but have found that it has led you to change your investing strategy too often, here's what I recommend:
Identify your investing timeline.
Develop one long-term strategy for the bulk of your portfolio (using basic principles like diversification) and stick with it.
Set aside a small fraction of your portfolio for riskier ventures and experimental investing.
This will allow you to pursue your interest in investing and apply what you learn to a small part of your portfolio without jeopardizing your long term financial well-being. And if learning about investing is less of an enjoyable hobby for you and more like a chore, maybe it's better that way. You can figure out a strategy that works for you, put it in place, and just check in on it once or twice a year. After all, sometimes the best investors are the ones who make a plan, get it up and running, and then forget all about it.