Avoiding major investment mistakes (with Jim O'Shaughnessy)
1. Automate Paycheck Investments
Set up automatic contributions of a fixed percentage of your paycheck into index funds, regardless of market conditions. This dollar-cost averaging strategy consistently outperforms most investors over the long term.
2. Consistent ETF Investments
Consistently make timely investments into a broad-based ETF. This simple act alone can lead to better long-term success than most investors.
3. Avoid Market Timing
Do not attempt to time market entries or exits, as this strategy is almost guaranteed to lead to poor performance.
4. Rethink Timing-Dependent Strategies
Rethink any investment strategy that relies on market timing, unless you are a world-class expert. Instead, adopt strategies that do not require precise entry and exit points.
5. Override Emotions, Focus Long-Term
Recognize that emotions are your worst enemy in investing; pre-set investment orders or focus on your long-term time horizon (e.g., 30+ years for retirement) to avoid short-term emotional reactions to market fluctuations.
6. Automate Investment Process
Automate your investment process, including buying and selling, based on a long-tested strategy. This helps consistently execute your plan and overcome emotional impulses.
7. Develop Personal Investment Process
Develop and consistently use a personal investment process or checklist that resonates with you to avoid emotional mistakes.
8. Invest in Broad Index Funds
If you lack passion for individual stock investing, invest in broad-based index funds or ETFs. This simplifies investing and avoids the complexities of individual securities.
9. Use Cheap Global Equity ETF
For long-term savings, a cheap, cap-weighted global equity ETF is a highly diversified and effective “one-stop shop” investment. This allows you to set it and then focus on other passions.
10. Ignore Market News & Hype
When making regular investments into broad ETFs, ignore market news and media “warnings” during downturns or “hype” during upturns. These are often driven by fear/greed and sales motives, not objective advice.
11. Avoid Locking In Losses
Avoid selling investments during market downturns, as this locks in losses. True losses only occur when you sell.
12. Don’t Rely on Conscious Will
Acknowledge that conscious will is often insufficient to override fear in market decisions, and you cannot reliably predict the right time to re-enter the market after pulling out.
13. Journal Investment Emotions
Keep an investment journal to record your emotional state during market events (e.g., fear during downturns). Reviewing past entries can remind you that things usually recover, helping you stay disciplined.
14. Young Investors: Own Stocks
Young investors should prioritize owning stocks over lending through bonds to benefit from compounding growth, as stocks offer greater long-term returns despite short-term volatility.
15. Young Investors: Embrace Ownership
Younger investors should embrace being “owners” (stocks) rather than “loners” (bonds) to achieve significantly higher compounded returns over long periods, as excessive risk aversion with bonds is detrimental long-term.
16. Reframe Short vs. Long-Term Risk
Reframe your perception of risk: what seems least risky in the short term (e.g., bonds) can be most risky in the long term (due to inflation, lower returns), and vice versa for stocks.
17. Diversify with Global Equity ETF
For US investors, consider a cap-weighted global equity ETF to diversify beyond domestic markets, as it still provides significant US exposure while capturing potential outperformance from foreign markets. Non-US investors should be very careful about over-allocating to their domestic market.
18. Don’t Bet Against the US
Do not “short” (bet against) the United States due to its unique characteristics like the Constitution, rule of law, and free speech, which foster innovation and economic dominance.
19. Avoid Long-Term Bonds
Avoid investing in long-term bonds due to interest rate risk, especially given current market conditions.
20. Use Laddered Bond ETFs
If considering longer-term bonds, use a laddered bond ETF strategy (e.g., owning 1, 3, 5-year maturities) to mitigate interest rate variability while capturing some benefits of longer-term rates.
21. Consider Factor Investing
Consider factor investing as a preferred method for public markets, as it leverages empirically proven characteristics associated with higher returns.
22. Combine Multiple Investment Factors
When using factor investing, combine multiple factors (e.g., a composite of value factors) rather than relying on a single one. This improves robustness as individual factors fluctuate in performance.
23. Invest in “Cheap Stocks on the Mend”
Consider a “cheap stocks on the mend” factor strategy: identify stocks that score well on value composites (undervalued) and combine this with a positive price momentum factor. This targets cheap stocks that are starting to be bought by investors.
24. Risk-Averse: Use Value Factors
Risk-averse investors should avoid price momentum factors due to their high variability. Instead, focus on composited value factors for a more stable investment approach.
25. Factor-Screen Micro-Cap Investments
Do not invest indiscriminately in micro-cap index funds, as most micro-cap stocks are poor investments. Instead, use factor-based screening (e.g., financial strength, balance sheet health) to identify high-quality micro-cap opportunities.
26. Understand Value Investing Principle
Understand that value investing, which involves buying assets for less than their intrinsic worth, is a fundamental arbitrage opportunity that eventually pays off.
27. Balance Growth & Value Investing
For active investors, balance your portfolio with allocations to both growth and value investing styles, tailored to your personal risk tolerance.
28. Disregard Future Forecasts
Be highly skeptical of future forecasts and prophecies for companies. To inoculate yourself, read old forecasts from respected sources and observe how often they were wrong.
29. Review Old Forecasts to Combat Bias
Combat hindsight bias by reviewing research reports and forecasts from five years ago. This demonstrates the difficulty of predicting the future and helps you avoid thinking past events were obvious.
30. Resist Giving Up Too Quickly
Recognize the human tendency to give up too quickly at the first sign of defeat. This applies to investing and other areas, highlighting the need for persistence.
31. Avoid Short-Term Performance Evaluation
Avoid evaluating investment performance or managers based on short-term (e.g., three-year) periods, as these are highly misleading due to reversion to the mean.
32. Evaluate Investors Long-Term
When evaluating an investor or portfolio, seek the longest possible track record for a more accurate assessment of their skill.
33. Contrarian Market Timing
As a contrarian approach to market timing, consider doing the opposite of what the majority of investors are doing. This can potentially improve timing compared to other methods.
34. Avoid Bubble Sectors
If you believe a sector is in a bubble but want to avoid the risks of shorting or timing options, simply avoid investing in that sector altogether. This is the safest, lowest-risk approach.
35. Focus on US Market Resilience
Focus on the long-term resilience of the US market, which has historically recovered from challenging periods. This awareness can help counter short-term fears.
36. Consider Investing in India
Consider investing in India, which has a strong demographic profile of young, educated people. Be aware of its challenges with corruption and bureaucracy, but recognize its significant economic potential if these issues are addressed.
37. Explore African Investments
Explore investment opportunities across the African continent due to its very young population and innovative developments. While educational progress lags India, rapid changes are occurring.
38. Research Pan-African Opportunities
If interested in Africa, research Pan-African investment opportunities to find innovative developments and growth across various countries.
39. Capitalize on Industry Arbitrage
Identify and capitalize on “arbitrage opportunities” in industries using outdated practices (e.g., publishing). Focus on innovation to enhance tools, reduce costs, and improve revenue sharing for creators.
40. Fund & Amplify Innovators
Support innovators and creators with funding and amplify their work to the world. Emphasize “show, don’t tell” by demonstrating their progress, successes, and failures to foster broader knowledge sharing among innovators.
41. Apply for Idea-Focused Fellowships
If you are an innovator, creator, or “off-the-wall” thinker with a great idea, consider applying for fellowships or grants that prioritize the idea itself, regardless of personal background.