Top 5 Stock Market Investing Mistakes (and How to Avoid Them)

During the latest episode of Fantastic Female Fridays, I discussed the top five stock market investing mistakes and how to avoid them. They consist of:

o ignoring market timing

o letting emotions get in the way

o forgetting why they bought the stock in the first place

o mistaking success for ego

o being inconsistent

For any of you who have ever interacted at any stage with Dr. Di Liddo, you will know that he is very passionate about the idea that the biggest mistake that anybody ever makes in the stock market is market timing.

Let’s explore that one then. I came across an interesting study published on the CFA Institute website that was featured in the Financial Analyst’s Journal. They looked at a scenario whereby, if somebody with perfect hindsight, drew down just the right amount of money between retirement and death, what would be the difference between what they could withdraw if they were to simply apply a buy and hold strategy or else take a trend following approach. The authors acknowledged the infeasibility of being able to perfectly time this, but the hypothesis was to interrogate if a trend following approach would make a difference in an environment where the amount of capital was steadily decreasing?

Interestingly, their findings were:

“Investors who used a buy-and-hold strategy with US equities would have encountered a huge variation in the amount they could withdraw from their retirement pot. Depending on the birth date, the PWR (Perfect Withdrawal Form generally varied between 8% and 12%, reaching as low as 4% and as high as 15%.

The 10-month trend-following strategy markedly improved investor outcomes. Around 90% of the time, it produced PWRs greater than the equivalent buy-and-hold equity strategy, and at low levels on the probability distribution, PWRs were almost double.”

In essence, most of the time, the ability to withdraw money from the account was equal or higher and on some occasions, you could take double the amount of money out while still having the capital to evolvingly produce returns in a “decumulation” scenario. This is a striking result.

So, if you want to pursue market timing, what should you do?

I outlined three approaches in the episode:

  1. Use the 50 and 200-day moving average. You can easily set these up by right-clicking on the “Price” section of any graph and then creating a moving average from there. I showed viewers how to do so on the VVC and S&P 500 graphs in the US.
  2. You can use the Market Timing Indicator. It’s very easy to read as above 1 is favorable and below 1 is unfavorable. I pointed out how when I began at VectorVest over a decade ago, everybody wanted to know how we fared with the recession etc. Now, people ask us how the system worked just before the cliff edge crash of the pandemic. Specifically, the MTI was at 0.98 on 24th February 2020. Check out any other dates yourself using the “Market Timing Graph” in the “Timing” area.
  3. You can look at the Market Timing Gauge on the Home page on any given day if you’re somebody that likes to move more rapidly. It’s derived from the market behavior on a day-over-day and week-over-week basis. If the buyers keep pushing the sellers up in price, the color guard can turn green which is a signal that the market is encouraging bullish investors. The yellow signal points out that the trends are weakening or reversing so it’s better to let the buyers and sellers sort it out between them. If it’s red, then the sellers are in control and unless you’re shorting, it can be an environment to sit it out.


I deal with all of the other five issues in the full episode and you can check it out right here at Fantastic Female Fridays!



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