Some tips to avoiding investment pitfalls
There is an old saying in the investment world — markets climb a wall of worry and 2023 was a great example of that.
Going into 2023, the vast majority of Wall Street economists predicted an impending recession. Add that to rising interest rates, high inflation, the unexpected Silicon Valley Bank collapse and the geopolitical crisis in Ukraine and you had enough to make even the savviest investor wary.
Despite all the uncertainty, the US stock market (S&P 500) ended 2023 with a strong 24% gain.
Experience has taught us that successful investing requires discipline and patience. When emotions run high, it can be easy to lose focus on your investment strategy. Investors need to remember that markets can be turbulent.
Understanding volatility and preparing for declines is essential. There can be a strong temptation to pull out of the markets when they tumble. Instead of retreating, you may need to adjust your investment approach. By remaining flexible, you could take advantage of opportunities while managing risks.
Market volatility causes many investors to try and time the market — sell at the top or buy at the bottom. The problem with market timing is you may miss an opportunity, especially since gains often can be made in a very short period of time. Look at last year for example, most of the stock market and bond market gains for the year came in the fourth quarter. This occurred after a dismal Q3 where markets pullback and interest rates rose.
Many investors were tempted to sit on the sidelines in money market funds. However, investors sitting on the sidelines missed the rally we saw in the last three months of the year.
Another common mistake is chasing performance, buying an investment based on its past performance. To appreciate the risk of this you must first understand how markets work.
Every day in publicly traded financial markets, buyers and sellers negotiate prices for every stock and bond. To agree, they have to find a price that they both think is a good deal. This happens over and over, millions of times a day and it starts all over again the next day.
A wise investor once said “markets don’t have memories, people do.” Unlike people, markets don’t think about the past. It’s about today and expectations for the future. Markets must be forward-looking to set prices that entice buyers to buy. Also, prices can't be too low or sellers won’t sell.
All available public information contributes to this decision-making process, ensuring all parties involved agree on a set price for a particular security at that moment. This process makes markets efficient, not perfect.
Constructing a portfolio based on last year’s winners may not yield the same success in the current year. Don’t base your investment strategy on what happened last year, look at the current environment and plan accordingly.
As of now, it looks like the economy avoided a recession in 2023 (recession announcements occur several months after a recession officially starts) and many recession predictions now have been kicked down the road to 2025.
No one knows exactly when the next recession will occur, but I am certain that in the future the economy will enter a recession and the market will react accordingly. Avoid these pitfalls, align your portfolio will your goals and time horizon and your investment experience should be smoother ride in the future.
• John P. Daly is the owner of Daly Investment Management LLC in Mount Prospect, a registered investment adviser specializing in wealth management and retirement planning. For more information, visit www.dalyinvestment.com