There’s an old adage that says you can learn as much from a bad experience as you can from a good one. I’ve been fortunate in that most of what I’ve learned is from positive experiences. However, I’ve also learned a lot from my negative experiences – and unfortunately, too many of those involve poor investment decisions.   

Every investor has a series of experiences that eventually forms their investing philosophy. That path leads either to long-term financial success or a lifetime of lost opportunities and suboptimization. In reality, you don’t have to be a great investor like Warren Buffett. Average investors who steer clear of bad investment decisions will find the long-term financial security we all seek.  

So rather than focus on what makes a great investor, it may be more helpful to consider what makes a bad one – and, more importantly, how to avoid mistakes that can set you back years in pursuit of your financial goals.

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1. Don’t Fall for Fish Stories

Just like the small mouth bass that probably wasn’t 14 pounds, the huge killing your friend or family member made in the stock market on a hot tip shouldn’t be a measuring stick for your investment performance. Confusing luck with savvy can lead you down the wrong path.

Even a broken clock is right twice a day, so while your friend may have made some money, it’s far better to follow an asset allocation strategy aligned with your long-term goals than to chase returns.

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2. Find the Right Risk/Reward Mix

It’s ironic: Too many young investors don’t take enough risk in their asset allocation, while those closer to retirement often take too much. If you have a lot of runway in front of you and you don’t need the money now, your risk appetite can be higher. Conversely, if you need to draw on your investments within a couple years, being invested in all equities is a dicey approach.

Sure, it’s been tough to own fixed income for an extended period – up until just recently, with historically low bond rates. But fixed income should be your “sleep well” money and should not be overlooked in your portfolio, even if it is a drag on your performance in the short term.

3. Avoid High Investment Fees

Fun fact: Net investment returns are higher for those who pay less in investment fees. It’s simple math – the more you pay in fees, the more your investments have to outperform to beat the averages.

That doesn’t mean you should avoid all fees or avoid paying a professional to help with your investments. However, taking a core and satellite approach with passive (low-fee) investments and paying for active management where you are likely to achieve additional returns is more likely to lead to greater long-term results. While both passive and active investing come with their own set of risks, those with a long-term horizon can blend both into a well-diversified portfolio.    

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4. Be Careful ‘Timing the Market’

This is a mistake investors make over and over again, and it’s one of my own personal downfalls … still. Getting the timing right often involves a spot-on prediction not once, but twice: Maybe you get lucky and get out at a good time, but what are the odds of you getting back in at the right time?

History shows you’re best to keep a disciplined approach throughout the business cycle. Generally, you should stay true to your asset allocation strategy and rebalance your portfolio from time to time to stay within your allocations. Taking some profits when the market has been frothy for an extended period, or investing some dry powder when major corrections occur, can be sound moves. However, these should be more on the margins than complete shifts in your asset allocation.

5. Never Surrender

Capitulation is never a good decision. I convinced myself I was a brilliant young investor during the late-90s tech bubble. I took on additional risk, started day-trading, and used a margin account to “speed-up” my portfolio growth.

Can you guess what happened next? The market dropped precipitously over a four-day period, with each day leading me to a higher level of stress and absolute fear. The day I couldn’t take it anymore I sold everything.

Now can you guess what happened? The market rebounded furiously over the next few hours. I still remember the evening anchor on CNBC saying, “If you sold this morning, you’re sick to your stomach.” The anchor was right.

The point isn’t that you should never sell or get out of a bad investment, only that if you act in fear, you are likely to get caught up in the herd. There are numerous academic studies showing human behaviors and emotions are not aligned for investment success. Greed and fear are a precursor to failure. When your emotions are telling you that you can’t lose or you’re going to lose everything, there’s a good chance you need to take a deep breath and avoid rash decisions. It’s not always easy.

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6. Know Your Speculation Limits

We all have different risk tolerance, and allocating some of your portfolio to startups, cryptocurrency, or the hot areas du jour may or may not align with that tolerance.

Some people are risk-averse and better off staying clear of speculative investments. If you’re someone who has a higher risk appetite, you must not allocate more to this area than you are willing to lose.

7. Don’t Put All Your Eggs in One Basket

There are countless stories of investors being deeply invested into a single stock for years and being rewarded with tremendous returns for decades. However, even bellwether companies can fall or certainly falter, and the results can be devastating to an individual investor. The best protection is tried-and-true portfolio diversification.

When markets correct as they did in 2022, it can be a discouraging experience for investors. However, our MOAA financial counselors always remind us that corrections are opportunities to buy securities on sale. It’s hard to stay calm when the world seems to be falling apart, but history tells us there will be better days ahead as the bulls and the bears struggle through market cycles.

If you consistently dollar-cost average through the peaks and the valleys, you’ll end up in a strong position. You don’t have to be great – average gets you there. You just cannot afford to be bad.

And if everything goes south and it is the beginning of the end, you’ll have far more pressing concerns with the resulting zombie apocalypse than worrying out about your investment portfolio. Stay invested!