Things to Avoid at All Costs

Drop everything and run when you come across ...

Feelings of certainty. They invariably come just before big surprises.

People who claim certainty. It's the most potent way to trick someone.

Risk-free returns. You'll end up with return-free risk.

People who have predicted 564 of the last two market crashes. And there are a lot of them.

Adjusting your risk-tolerance when stocks are either crashing or surging. It's the easiest way to make a financial decision you'll regret.

Putting 30 years worth of savings into something you spent seven minutes researching. You have no right to complain about losing money in an investment you put no effort into understanding.

Extrapolating the recent past into the future. Things always change. If your forecast doesn't, you're doing it wrong.

People who aren't willing to change their minds. Including yourself. Especially yourself.

Feeling smarter after the market goes up. You had nothing to do with it.

Explanations of what were likely random events. This means almost every market move that takes place in time periods less than one year.

Having political feelings within ten miles of your investment decisions. This is a common way smart people make dumb decisions with money.

Spending more time arguing why other investors are wrong than trying to figure out what you're doing wrong.

Spending the majority of your time in a job you hate in order to make enough money to spend part of your time in a life you don't hate.

Precision. Finance just doesn't work that way.

Impatience. It's the fastest way to disappointment. 

Investments you can't explain to a third grader. If you can't, you probably have no idea what you're getting into.

Assuming your past investing behavior isn't indicative of your future behavior. It's the best guide you have.

Assuming that the random life experiences you've had provide a complete view of the world. Everyone has their own version of history and it's a tiny reflection of reality.

Reliance on pensions, inheritances, Social Security, or the decisions of anyone other than yourself to make it through retirement. Few third parties care about your wellbeing decades from now.

Six-figure student loans before you're old enough to drink. This is starting out life with your hands tied behind your back.

Assuming investors who wear suits are smarter than you. Being a smart investor has little to do with education or job title and everything to do with behavioral traits.

Assuming intelligence in one field translates to being a smart investor. I doubt there's any correlation.

Assuming that bad investments you made were the result of bad luck and good investments you made were all skill.

Measuring investment fees in basis points instead of dollars. An advisor saying, "My fee is 100 basis points" sounds so much better than, "This will cost you $35,000 per year."

Feeling entitled to investment returns, a decent job, or predictability. 

Trading on margin. Most people can't handle market volatility without leverage.

Trading, in general. You're fighting randomness and computers that can solve a trillion problems before you can blink.

Worrying about things you can't control. Like what the Fed will do next, what the market will do next month, or whether earnings will beat expectations.

Avoid those, and most everything else should fall into place.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

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Read/Post Comments (6) | Recommend This Article (90)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 25, 2014, at 7:35 PM, drborst wrote:

    Trading on Margin I don't do, but what does ,"Most people can't handle market volatility without leverage" mean?

    I can handle market volatility without leverage just fine, it's using leverage that scares me (or maybe I don't know what leverage is)

    DRB

  • Report this Comment On July 26, 2014, at 2:27 PM, TMFVelvetHammer wrote:

    >>Putting 30 years worth of savings into something you spent seven minutes researching.<<

    Peter Lynch wrote something along the lines of how most people "spend more time picking a microwave oven than researching stocks."

    You can't be excellent -- or even adequate -- at anything without devoting time and effort into it.

    Well done, Morgan.

  • Report this Comment On July 27, 2014, at 1:11 AM, islanders1986 wrote:

    @drborst

    That is why it says most people and not all. You are one of the people he is saying can handle market volatility without leverage; in fact most of the people browsing this website are probably in that category.

  • Report this Comment On July 28, 2014, at 4:48 PM, Trashman0430 wrote:

    If you need to leverage stay out. Borrowing money to invest is stupid.

    Every good investor knows not to invest money he will need in the near future or doesn't have. If you don't have the money to invest you surly are in need of it now so don't borrow to invest.

  • Report this Comment On July 29, 2014, at 2:15 AM, hbofbyu wrote:

    I see a slight contradiction between:

    "Feeling entitled to investment returns, a decent job, or predictability."

    and

    "Spending the majority of your time in a job you hate in order to make enough money to spend part of your time in a life you don't hate".

    I agree that no one is entitled to a decent job. "By the sweat of your brow you will eat your food..."

    Your time on this earth isn't rent free. Unless someone else is taking up the slack and giving you a free lunch, the rule is, you don't work, you starve.

    You may have to spend a good part of your life doing something you don't love. I know too many people who are perpetually unemployed because they won't work at a task that isn't their "calling". Isn't a job you hate better than being destitute and relying on welfare, handouts and unemployment checks? But then, no one should hate dignified work in itself. I see too many people whose dream job will not pay them enough to earn a living (how many wedding photographers does the world need?) and produce nothing of substantial value to the economy or society.

  • Report this Comment On July 29, 2014, at 8:38 AM, Mathman6577 wrote:

    "Putting 30 years worth of savings into something you spent seven minutes researching."

    I once spent nearly 2 or 3 months deciding whether or not to buy a stock. $AAPL turned out ok for me.

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