Avoid These Two Critical Mistakes

Stocks around the globe have seen more than $3 trillion wiped off their valuations so far in 2016.

Now, I’ve been in the investment business since the 1980s, and I’ve witnessed every large market decline since the 1987 crash.

And right now, investors are making two major mistakes that will cost them profit opportunities in the months and years ahead.

Mistake #1: Pouring Into Index Funds

The first big mistake is that investors are pouring money into index funds.

Data from Morningstar for 2015 shows that investors pulled $207.3 billion from actively managed funds and put $413.8 billion into index funds.

This is ironic because, in 2015, actively managed funds outperformed index funds for the first time since 2012.

Investors need to realize – and quickly – that the investment climate has changed. Index funds are only good when the investment clime is ideal – falling interest rates, a booming global economy, and plenty of liquidity.

After all, a tide of liquidity and good news lifts all boats.

But when the market looks like it has in 2015 and 2016, the only thing index funds will get you is an assured loss. The dirty little secret of the stock market is that there are often long periods – perhaps as long as a decade – when the tide goes out, and overall market returns are flat or even negative.

We’ve been in a benign period for so long, investors have simply forgotten – and they’ve piled into index funds at just the wrong time.

In the current climate, the words of legendary investor Sir John Templeton should be remembered: “If you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can’t outperform the market if you buy the market.

I believe we’re in a period in which you should look to outperform the broad market. That means choosing very carefully where you invest your money.