Suze Orman: These Are the 3 Biggest Mistakes You Can Make as an Investor
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Peter Burns
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Justice Petersen
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Most people know this investing advice: Buy low, sell high. And while that sounds simple, it’s actually very difficult to do. Many invest with the best intentions, hoping their money will make money without them lifting a finger. However, many end up losing money instead.
Personal finance expert and New York Times bestselling author, Suze Orman addressed the challenges of being an investor on her podcast. In an episode called “Suze School: The Biggest Mistakes You Make as an Investor,” Orman shared some advice to help you get your investments in order.
Giving In to Fear
Investing can be scary, especially if you’re putting a lot of money into a stock.
Consider this: Maybe you do research and find an outstanding stock. You consider buying some shares, but because of the risk, you decide not to invest. A short time later, the stock takes off just as you’d predicted, and you’re left kicking yourself because you missed your chance.
Orman says the biggest investing mistake you can make is making decisions based on fear. During her time as a stockbroker, she found that her clients fit into two categories: those that invest and hold no matter what happens, and others that invest and sell at the slightest dip in price.
Investors who give in to fear suffer from what’s known as myopic loss aversion (MLA). MLA is also known as an investor’s tendency to focus more on the short-term outcomes of a stock rather than the long-term benefit. As Orman observed, MLA often leads to selling investments too soon and losing out on potential profits.
DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) found that investors with $100,000 who bought and held S&P 500 throughout 2023 would earn $26,288 and have a total of $126,288 at the year’s end.
But to do this, investors must hold their investment through multiple dips. Orman found that her clients who held the stocks because they were confident in their selections made much more money on average than those who sold due to fear.
One way to avoid giving in to fear is by reframing risk. Try viewing risk as a potentially rewarding part of your journey instead of a potential loss. Recognizing and transforming your fear can help you hold your investments and gain more profits in the long run.
Focusing on What You Had
When investing, it’s essential to focus the present. Thinking too much about what you had before instead of what you have now can skew your perspective.
If you buy into a stock at $10 and it raises to $50, you’ll have a lot of profits and will be very happy with your decisions. If that stock drops from $50 to $20, you, like many investors, might feel like you lost money.
But on the other hand, you haven’t really lost $30 per share. You’ve still gained $10 per share.
Orman explains that investors should never look at the gains they once had and consider them losses. You must compare your stock values to the price point you bought them at.
Making decisions based on your gains instead of your phantom losses will lead to more success.
Not Using Dollar-Cost Averaging
When you invest, the value doesn’t always increase. The price will often drop, and if you’ve invested all of your money already, you will miss out on an opportunity.
For example, let’s say you put all of your money into a stock that’s $50 per share, but it begins to drop. Because you’ve invested everything you had as a lump sum, you are losing money and missing an opportunity to buy that stock at a lower price.
Many people think they need to invest all of the money they’ve set aside right away. According to Orman, this is a huge mistake. Dollar-cost averaging is her most important investment rule.
Dollar-cost averaging is an investment strategy where you invest a fixed amount in regular intervals instead of everything at once. By doing this, you can take advantage of price dips to buy more shares of a stock with the same amount of money.
Fidelity showed how this works with $5,000. When all $5,000 was invested in a lump sum of stock worth $20, it resulted in 250 shares. Then the same $5,000 was spread out in fixed investments over 5 months, with the stock price fluctuating between $18 and $21. This resulted in 253.4 shares due to dollar-cost averaging as opposed to 250 shares from lump-sum investing.
You can get more from your money if you’re patient and willing to take your time. Ultimately, waiting for the right opportunity tends to pay off.
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