There's an old canard about poker: If you look around the poker table and you don't see the patsy, then you are the patsy.
In case you don't know what a patsy is, it's a person who is easily manipulated or victimized. A chump. A mug. A sucker. The word is believed to be derived from the Italian pazzo, meaning fool or crazy person.
So who is the patsy at the investment table? You are, if you:
Try to time the market. Ally Bank has an ad asking Thomas Sargent, Nobel-Prize winning economist, if he can say what interest rates are going to be in two years. He admits he can't. And if he can't, you can't either. It's a fool's errand to try to predict the future of interest rates, stock prices, or industry trends. The trend may be your friend, but the fact is, trends are hard to identify early in the process when they can make you money. Usually, by the time you spot a trend, it’s already past its prime. So the patsy rushes into stocks after the market's been going up for a while and is ready for a correction, or holds onto stocks as the market goes down, then finally gives up and sells just as prices are bottoming. The patsy buys the highly ranked mutual fund—the one that's latched onto a positive trend for several years—just as it's starting to cool off and underperform.
Jump on the latest fad. If everyone is talking about Facebook or Apple or Netflix, it must be a good prospect, right? Not necessarily. Sometimes a company can have good management and a popular product, but it makes for a lousy investment because the stock price has been bid up too high. The more a stock is promoted, the more likely it is to top out and start to decline. The patsy buys the latest stock promoted in the financial news, or worse, on a tip from a friend or relative. Face it, by the time you've heard the rumor, it's probably old news to the insiders and professional traders. Ask my neighbor. He bought Facebook the first day it came out. Now he's down $10 a share.
Don't do your homework. Unless you can read income statements and balance sheets, and have some special insight into a company and an industry, you have no business buying an individual stock. There are too many hidden variables that can impact a company. A new product from a competitor? An accounting scandal? A failed acquisition? Turmoil in the boardroom? The same goes for commodities, or any specialized ETF you might think represents the “wave of the future,” even though you know little about the underlying business. I remember the alternative energy ETFs a couple of years ago, when Barack Obama was going to get elected and usher in a new world of clean energy. Most of those ETFs are now worth half of what they were in 2008.
Are a frequent trader. My brother-in-law likes to go down to the bar at the beach and talk investments with his friends. He has a good time, buys drinks, and eats tasty snacks. He gets lots of tips on Internet stocks, and he has an opinion about every economic issue that hits the news. And his opinion changes every week. He buys and sells obscure stocks two or three times per week, sometimes holding them for just a day. Out of all the stocks he buys, one or two actually do pan out. But most of the time he loses money. If he ever does make a profit, he pays a higher tax on it because it's a short-term investment. And meanwhile, he has to pay an accountant to sort out his few gains and many losses to figure his tax liability.
Think you can outsmart the experts. There are always a few people who “beat” the market. They exploit their special knowledge about a particular industry, or maybe they possess uncanny mathematical skills, or just have dumb good luck. But most people do not have insider knowledge or genius-level math skills. And, by the way, if they do, they're not going to share them with you, so don't fall for the ads claiming you can triple your money in two short months if you only use this special, secret system. The fact is, for most investors, the best way to grow your money is the old-fashioned way—dollar-cost average into an index mutual fund like the Vanguard Total Stock Market Index Fund (VTSMX) or Fidelity Spartan 500 Index Fund (FUSEX), or an ETF like the SPDR S&P 500 Fund (SPY) or the SPDR Dow Jones Fund (DIA).
I understand, it's not that exciting. But when you're putting your retirement on the line, you need to look at your investments as a way to increase your savings, not provide you with excitement and entertainment.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.