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Common Investor Mistakes

Rebalance IRA Investment Committee member Burton Malkiel on the most common investor mistakes.

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Well, the biggest blunder that people make is by letting their emotions get a hold of them, by buying only when people are all optimistic, and by selling just during those inevitable periods we’re in recession and things are tough.

The other blunder we make is, we tend to go and buy those stocks or those funds that invest in those stocks that are currently popular. That’s what happened in the 1999-2000 period, and people simply piled into the Internet stocks. And it didn’t work for them. It’s not that the Internet wasn’t important. It’s not that the Internet didn’t grow.

But take a company like Cisco Systems. Cisco makes the switches and routers, the backbone of the Internet. Cisco grew rapidly during the first decade of the 2000s. But you lost 80% of your value if you owned Cisco stock. Why did you lose 80% of its value? The reason is that Cisco sold at 125 times earnings in 1999 and early 2000. And now, it’s selling at 13 or 14 times earnings. So yes, the earnings grew. But the price-earnings multiple collapsed.

There is a study by Dalbar Associates that asked the following question: “What does it cost investors simply because of their bad timing going into the market when you’re optimistic and out when you’re pessimistic and going into the wrong types of funds?” And Dalbar found that this cost investors 5 percentage points of return. And that’s the kind of blunder that we’re trying to avoid, and I think we will avoid it, with the way that we have set up Rebalance IRA, with its dollar-cost averaging, with its broad diversification, with its low costs, with its use of index funds. We think we can avoid those mistakes, and I’m pretty sure we will.

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