The 8 Most Dangerous Investing Mistakes

Stocks have been on a tear since Donald Trump’s election. And the bull market celebrates its eighth birthday this week. But even in a market that goes almost straight up, it’s important to avoid pitfalls. Here are some mistakes I’ve watched investors make repeatedly. Alas, I’ve made a few of them myself.

1. Getting spooked by the bears

There are always solid reasons why the stock market should go down. Some of the smartest people I know are almost always bearish. But I think the investors who do best in the market tend to ignore many of the bearish indicators and, instead, stick to their long-term stock allocations. Over time, the market has gone up about two of every three years, on average — and that’s going back more than 100 years. You have to have a powerful reason to bet against those odds.

2. Ignoring fund volatility

In a bull market, taking extra risk generally pays off. But in bear markets, high volatility amplifies your pain. What’s more, academic studies have shown that risk-adjusted returns are more predictive of future returns than raw returns. You can find risk-adjusted fund returns at Morningstar.com. Just click on ‘Ratings and Risk,” and look at standard deviation — which measures the volatility of a fund’s monthly returns over three, five and 10 years — and Sharpe ratio, which measures the risk-adjusted returns over those same periods.

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Consider one of my mistakes. Bridgeway Aggressive Investors 1 (BRAGX (opens in new tab)) used to be one of my favorite funds. But in the 2007-2009 bear market, it tumbled 64.4%, compared with a 55.3% loss for Standard & Poor’s 500-stock index. The fund has done well again lately, returning an annualized 14.8% over the past five years, an average of 0.8 percentage point better than the S&P 500. But Bridgeway was 35% more volatile than the S&P over the past three years, and I would prefer not to risk outsized losses in the next downturn. (All prices and returns in this article are through March 8.)

3. Paying too much

I love Amazon.com (AMZN (opens in new tab)). I’ve practically ceased going to stores because it’s so much easier and less expensive to just click a few buttons. I read books on a Kindle and watch Amazon video. It’s not the stock’s price, $851, that scares me. It’s that the shares trade at 110 times the company’s estimated earnings for the coming 12 months. That’s more than six times the price-earnings ratio for the overall market. Yes, I know that the company is still growing like a weed and that the narrow profit margins on its main businesses should widen, eventually. But the shares already reflect a ton of good news. For the stock to continue higher, it will have to do even better than investors expect. I’m passing on Amazon at this price.