Basic investing doesn't have to be difficult. But all too often, investors are their own worst enemy, as they make easily preventable mistakes that end up costing them a huge portion of the returns they would earn with a simple investing strategy -- along with one key ingredient.
I'll talk about that secret ingredient to investing success later in this article. First, though, let's look at the trap that so many investors fall into.
Great investments, bad timing
At Morningstar's investment conference this week, a panel of mutual fund researchers tried to figure out what the biggest challenges were that financial advisors have to deal with in working with their clients. As Financial Advisor reported, panel members noted that lower returns over the past decade for stocks and other asset classes have forced investors to change the way they think about making realistic assumptions concerning potential portfolio growth.
But the key point that the panel made was that investors themselves make bad decisions about when to buy into certain investments. In particular, most investors tend to chase performance, latching onto whatever investments have done best recently -- just in time for those investments to top out and start falling.
The perils of chasing performance
Unfortunately, we've seen investors make that same mistake countless times. Investors did it with margin-induced speculative fever for stocks of all kinds in the 1920s, tech stocks in the late 1990s, and homebuilder and bank stocks in the mid-2000s -- all with the same eventual result. Last year, the SPDR Gold Trust (NYS: GLD) briefly became the most valuable exchange-traded fund in the market -- at a time that turned out to be its high, as gold has retreated more than $300 per ounce since then.
Most recently, much of the interest in the Facebook (NAS: FB) IPO came from the fact that its share price on private exchanges had steadily soared over the years before it came public. Regular investors wanted in on that growth and assumed that it would continue indefinitely into the future.
Moreover, investors don't just make that mistake with stocks and commodities. Even with stocks at reasonable valuations by many measures, low-interest bonds continue to attract huge amounts of capital despite guaranteeing a loss after accounting for inflation.
Even investors who should be experts about a stock can make similar mistakes. Back in 2008, Chesapeake Energy (NYS: CHK) CEO Aubrey McClendon made such a huge bet on his stock that he ended up facing margin calls when the stock plunged following the end of the energy boom during the financial crisis. Several insiders at General Growth Properties (NYS: GGP) ended up in the same predicament after the bottom fell out of the real estate market, pushing the company into a cash crunch that would eventually force it to go through a bankruptcy reorganization.
Solving the problem
So, what's the secret to beating the timing trap and investing successfully? It's simple: Have a plan and stick to it.
It takes extraordinary amounts of courage to buy stocks that are out of favor, and even more discipline to hold onto them if they continue to lose ground after you buy them. It's all too easy to question your initial premise, convincing yourself that you must have missed some key detail that will result in further losses if you hold onto your shares. Waiting for the rest of the market to discover a company with strong potential can be excruciating.
But the long-term rewards from having that discipline will help reinforce your resolve over time. Those who believed that Las Vegas Sands (NYS: LVS) would avoid bankruptcy and remedy the worst of its woes during the financial crisis have been richly rewarded, and Las Vegas Sands is far from the only example. Obviously, you won't make every call right, and some of your picks will lose money. But by making the most of the calls you do get right, you'll put yourself in far better position to earn -- and more importantly, keep -- profits from your investments.
Make the time
It may feel good to be part of an investing crowd, but more often than not, you won't make much money that way. The best chance to produce outstanding results is to avoid chasing performance and instead look to down-and-out sectors of the market that have promise that other investors haven't yet seen.
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The article Don't Buy the Right Stocks at the Wrong Time originally appeared on Fool.com.Fool contributor Dan Caplinger has far-from-perfect timing. He doesn't own shares of the companies mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Facebook and Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. It's always the right time for the Fool's disclosure policy.
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