Don’t Make These Costly Mistakes in 2021
It’s New Year’s Day and the markets are closed. I’m optimistic about investment prospects in 2021, but on this holiday, let’s take a moment to discuss the moves you shouldn’t make in the coming year…or in any year.
Super investor Warren Buffett once famously said: “In the short term, the market is a popularity contest; in the long term it is a weighing machine.”
What the heck did the Oracle of Omaha mean by that? Simply put, Buffett doesn’t necessarily wait for the market to eventually reward the merits of stocks; he chooses stocks according to their potential as companies. Buffett emphasizes long-term ownership of a company, not just the chance for fast capital appreciation based on market dynamics.
Another adherent of those tenets is my colleague Jimmy Butts [pictured], the chief investment strategist of the premium trading services Maximum Profit and Top Stock Advisor.
With “short-termism” running rampant during the coronavirus crisis, I decided it was a good time to chat with Jimmy about the state of the markets and how to trade now.
What’s the number one mistake that investors are making now?
It’s short-term thinking, driven by headlines over the coronavirus pandemic. The underlying problem is that most investors are prisoners of short-term thinking.
For literally thousands of years, humans have been conditioned to think in the short-term. Our focus has been on survival. We needed to ensure we had another meal, a warm place to sleep, and that we were safe.
Even today, long-term thinking doesn’t come naturally. That’s why so many people have trouble saving for retirement. It’s also why politicians always wait until the last possible moment to pass crucial legislation, such as we saw this past week with the second coronavirus stimulus bill.
Too many investors focus only on the short-term. They fret over day-to-day performance and forget that investments are meant to grow their wealth over a long period.
Explain why time is a powerful investment tool.
Another costly mistake is chasing a fast buck. If your goal is to get rich “overnight,” then you should go buy a handful of lottery tickets. By contrast, it takes years to earn truly life-changing wealth in the stock market.
That certainly doesn’t mean you can’t see gains of 20% or 30% in a year or less. The good news is that even if you don’t have decades to invest, you can still generate significant returns in a relatively short amount of time.
However, truly life-altering investments, those that return hundreds or thousands of percent, take years to reach their full potential.
Keep in mind, though, that time alone won’t make you wealthy. There’s another factor that’s important. I’m talking about dividends…namely, dividend growth.
You’re right, but it’s often hard to persuade investors about the power of dividend stocks. Dividends aren’t sexy. They don’t grab headlines in the Wall Street Journal or get Jim Cramer hyperventilating on CNBC.
Another blunder is to indiscriminately chase after the glamorous and pricey “story stocks” that get hyped on financial television. Investors need to understand that a solid company that grows its dividend each and every year can lead to a staggering amount of wealth over time. That doesn’t sound “boring” to me!
Dividends not only motivate top executives to deploy capital efficiently, they also send a clear message that management is treating shareholders right by paying them the profits they deserve as co-owners of the business.
The coronavirus pandemic is generating considerable stock market volatility, but volatile markets are simply something investors will have to deal with for the foreseeable future. There will be times of calm and I believe over the long term the market will move higher. But thanks to the situation we’re in, the market will continue to swing, sometimes wildly.
The stock market racked up decent gains in 2020 and the bull market should continue in 2021, but we’ll see dips along the way. Although I’d love to see a steadily rising market, these selloffs are opportunities to pick up shares of great stocks that pay rising dividends at bargain prices.
Do you think a sell-off this year would present a buying opportunity?
If you looked back at the past century, you’d see there hasn’t been a single sell-off that didn’t later turn out to be a terrific opportunity to buy stocks, assuming you bought solid companies at attractive prices and had the resolve to hold them for the long term.
This includes The Great Depression… the sell-off in 1937… the sell-off between 1973-74… the 1987 crash… the “dot-com” crash… and the most recent financial crisis and recession.
All of these times turned out to be wonderful opportunities to buy. I understand why many investors get nervous. But successful investors use these periods to load up on solid stocks that have a proven history of raising their dividends…and they generate enormous profits in the process.
The point is, you should not let COVID-19 fundamentally alter the way you pick stocks. Does it change the calculus? Absolutely. Only a fool would deny that. But it would be equally foolish to base all of our investment decisions purely on COVID-19. Don’t let the drama on cable news derail your long-term investment goals.
Editor’s Note: The distribution of safe and effective coronavirus vaccines is a hopeful development but the pandemic isn’t completely behind us. You can expect further volatility as 2021 unfolds.
Now’s an opportune time to conduct a “deep dive” into dividend stocks, a reliably stable asset class that can protect and grow your portfolio. As my colleague Jimmy Butts just explained, many investors make the mistake of underestimating their appeal.
Dividend-payers are time-proven vehicles for long-term wealth building, but they’re also safe harbors in turbulent seas because companies with robust and rising dividends by definition boast the strongest fundamentals.
Dividend-paying investments are suitable for bull or bear markets. Not only are top-quality dividend payers attractive sources of steady income, they also offer the potential for strong growth.
Our investment experts have pinpointed a bevy of high-quality, double-digit yielders. Want to learn more? Click here for our dividend report.