Investing seems scary, and investing during a bear market is even scarier. Believe it or not bear markets are an important part of a healthy business cycle, corrections are needed to ensure prices are not overly inflated. It is true that market corrections put a little dent in our portfolios, however the big losses are due to our emotions and investment mistakes in a bear market where we try to reduce losses but actually are losing more. What are some of these mistakes?

Sell, Sell, Sell…

When markets tumble everyone gets freaked out and starts selling without any logical reasoning or attention to long-term goals. As the sell-off continues more investors jump on the train and sell their investments, often they all miss the fact that they are selling at the bottom to only repurchase them back at the top. Stop selling without a reason, only sell if the fundamentals have changed for the long term or the investment does not fit in your plan, not because everyone else is selling in the market.

Stop Investing

The only worse thing one can do than selling out in a bear market is stop investing during the bear market. People get scared and think the markets are falling apart and believe there is no point in investing. Would you stop shopping if retail prices dropped 30%? No. You would probably buy even more because everything is on sell now so you’ll take advantage of the good prices, same concept applies to investing. There is a huge sell going on in the financial markets during bear markets and you should take advantage of it and not hide from it. When you stop investing during a bear market you will miss out on many undervalued investment opportunities which can have great returns in the long run.

Look at Alternative Investment

Some investors start to look at alternative investments because they believe somehow these will perform better than the equity markets. In this recession the focus has been gold investment, gold is reaching all time highs and investors believe gold is a great place to invest. Frugal Dad recently answered a readers question regarding gold, here are my reasons why gold is a bad investment. Although alternative investments have their place in a portfolio the excessive focus during bear markets makes them dangerous.

Timing the Market

Unless you have a crystal ball or have some psychic abilities just stop wasting your time and money trying to time the markets. Investors are more likely to time the markets during a bear market, as there are often big swings, which are seen as opportunities by investors, this strategy will only hurt your portfolio.

I know bear markets hurt, but you trying to “improve” things will only make things worse. Successful investing is not magic, just keep things simple and maybe follow few investing and money rules of thumb and you’ll be fine in the long run.

What were your investment mistakes during this bear market? What have you learned from them? You know anyone who made these mistakes?

Rachel writes in with the following question about investing in gold:

I enjoy reading your blog about wise spending. I have a question and I’m not sure who to go to. My husband is interested in investing in gold. What are your thoughts on investing in this direction? Do you have other sources that you lean on for investing advice?

Photo by Muffet

Rachel, your question comes at a good time. I spend a lot of my day listening to a variety of talk radio programs at work on subjects that range from sports to politics to personal finance. All three tend to run a lot of advertisements for investing in gold. While intrigued, I confess to not knowing much about investing in commodities, so to answer your question I decided to dig into some research while asking the Frugal Dad community for help with your question.

Why Invest in Gold?

A recent check of gold prices shows it is hovering around $1,000 an ounce. It seems like every week or so gold prices set another record. But in the world of economics, it is usually true that what goes up, must come down. That’s not always the case, but I wonder if gold prices will work the same way.

As the market moves ever-so-slowly towards recovery, will gold prices remain high? Who knows? Conventional investing wisdom says gold is a safe bet when times are tough (inflation, weakening dollar, etc.). We’ve certainly had tough times, but to this point it seems inflation has been kept in check. I’m not completely sold on the idea our government will be able to control devaluation of the dollar as more and more money is pumped into the system.

So the real question is, “Is now the right time to invest in gold, or would investors be getting in at the top only to see their investments disappear in a recovery?” I think the answer to this question is the same answer I give to others interested in any form of investing:  Invest for the long term, don’t try to time the market, and diversify.

If you’d like to pick up a few gold coins, or bullion, as a percentage of a broader long-term investment portfolio, that seems reasonable. If you dump your entire nest egg in gold, betting on the continuation of tough times, well, that just sounds too risky for my liking.

Ask the Readers: OK readers, I know there are plenty of you out there smarter than me on the subject of investing in gold. What more can you tell Rachel about gold investments? Is it better to invest in physical gold, mutual funds, etc? What are your thoughts on the timing of making new purchases of gold? Feel free to make any specific brokerage recommendations you may be familiar with as well.

The past year and a half has been rough for investors, although many investors have grown tired for the financial advisers and have become DIY investors, others who have lost money are too frightened to do it themselves and have turned to financial advisors.  Although nothing is wrong with having a good financial adviser, you have to understand that there is no magic to investing, the financial advisor doesn’t do anything you would be able to do yourself so why pay those hefty fees? A little while ago I provided some investing tips for successful investing, if you follow most of those tips you should be fine.

How to Become a Successful Investor?

There is no magic to investing, although the investment industry tries to confuse investors and make things look complicated, there is no reason to be worried.  First step to becoming a successful investor is to keep things simple! I am a big fan of simplifying finances and investing, there are too many investment options available and too many contradictory opinions, the best thing you can do is keep your investment portfolio simple, here is how.

How to Simplify Your Investment Portfolio?

1.  First find a good online discount broker, you can follow these tips to find the best discount broker for you. Discount brokers can save you a lot of transactions costs when it comes to investing.

2.  Establish your asset allocation and investment policy statement. Asset allocation will help you determine how to allocated your assets between different asset classes. When you have your written investment policy statement ensure that you stick to it, only this way can you keep your emotions out of your investment and simplify your investing. You can download a sample investment policy statement from our site.

3.  Purchase Index funds or ETFs, often investors purchase expensive mutual funds thinking active manager will perform better. The fact is that active managers lose to index funds, there is no point in paying hefty fees to mutual fund mangers when you can get better performs by investing in index funds and ETFs.

4. Ignore the Noise. Don’t pay attention to the media and so called experts, the media is known to exaggerate the reality and the so-called experts will only confuse you since most of them don’t agree with each other. Keep your focus on your long-term goal and ignore the noise.

5. Rebalance. Although I like passive investing, passive investing does not mean just leave things. Markets will fluctuate and your portfolio asset allocation will change you need to rebalance your portfolio along with market changes, this will ensure you are staying within your determined asset allocation.

Just following those five steps you will be able to dramatically simplify your investment portfolio, as I mentioned at the beginning there is no magic to investing, just keep things simple and follow some investing rules of thumb.

How do you feel about your investment portfolio? Do you find it confusing? Have you simplified your investment portfolio? Any tips you’d like to share?

The past 18 months have been difficult for most investors, the stock market has seen the biggest “correction” since the great depression, “blue chip” companies have cut dividends, had massive layoffs and even begged the fed to bail them up. Not to mention the investment frauds of Bernard Madoff and Ed Earl Jones costing investors their lifetime of savings. More and more investors have decided to become “Do it Yourself” (DIY) investors and often rightly so. There really is no magic to investing; anyone can do it as long as you follow simple rules. Previously we published 10 investing tips to become a successful investor to help DIY investors. Although there is no magic to investing if you are a new DIY investor you can easily fall into the common investing traps and ruin your portfolio – detailed below.

5 Fastest ways to destroy your investment portfolio

1. Short Term Trading

This is one of the best ways to destroy your investment portfolio. With online discount brokers it is very simple to just buy and sell securities with the click of a mouse, sit in front of your monitor and constantly watch your stock price. Of course when you see your stock take a little hit just click sell and it’s sold. Thank god you acted fast and only took a 2% loss; you do that a few times a month and got your self a 10% loss. We are not even talking about fees. Statistics show that short term trading fails over the long term in overwhelmingly majority of cases. Very few people can be profitable day traders. So if you want to destroy your investment portfolio, start with short term trading.

2. Buy the “HOT” stock – Get Rich Quick

A few weeks ago a friend of mine called and said a co-worker had given him a good tip on a stock and he should buy some, he was considering a $10,000 purchase. So I asked him some basic questions: “What does the company do”, “What do analysts say”, “What’s the management’s history?”… He did not know the answer to any of these, and decided to ask the person who tipped him…he had no clue either but was sure it’s a good investment his brother-in-law’s friend had said so. I advised him against the purchase and his colleague is now down 35% in 2 weeks …OUCH! There is almost no better way to demolish your portfolio than to follow the “hot” stock tips or the get rich quick stocks. Purchasing strong, stable companies is boring!

3. Buy Exotic Investments

The investment industry loves creating new investment products, every few months some new exotic investment is brought to the market. Investors jump at these investment vehicles without understanding the risks associated with them. A great way to destroy your investment portfolio: put a large chunk of your retirement fund into these exotic investments and watch them disappear.

4. Do not have an Asset Allocation

One of the first things any investor should do before investing is have an asset allocation and stick to it, well that is for anyone who wants to see their investment portfolio grow. Asset allocation ensures you are diversified among all asset classes (stocks, bonds, cash etc). Studies show that over 90% of your portfolios variability is due to your asset allocation – not sticking to your asset allocation is crucial to the destruction of your investment portfolio.

5. Ignore Diversification

Every investor knows or has at least heard of diversification, it’s the cornerstone of every good investment portfolio. Simple concept: don’t put all your eggs in one basket. Diversifying your investment portfolio will ensure that your investments are spread out and you are not taking more risk than you need to. Just ignore this important concept and your investment portfolio will surely vanish.

You combine these five tips and you are guaranteed to lose more money in the stock market than you have ever dreamed of.

What tips do you have for those who want to demolish their investment portfolios? Any bad investment decisions you have made in the past?

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I’ve posted a couple Lending Club reviews here before, along with the occasional progress report. The last thing I want to do is bombard you with updates on my Lending Club portfolio, but since an opportunity came along to help you earn $50 just for signing up, I thought I should mention it!

Between now and August 15th, those who sign up to invest with Lending Club and use the referral code “FrugalDad” will receive $50 to add to their portfolio. You must use the referral code to receive the $50 bonus.

My own small portfolio of loans is still moving along nicely, with a net annualized return of 11.21% (try beating that in this market!). In fact, as of August 7th, 2009, the average net annualized return for Lending Club lenders if 9.61%, so I guess that puts me a little above average.

I know from previous reviews of Lending Club that a number of you are interested in their service, but weren’t quite ready to take the leap to invest. I understand, as that’s how I felt for a long time. However, as my frustration with traditional banking and investing grew, the market volatility continued, and my overall desire to diversify investments increased, I became more and more attracted to a service like Lending Club.

Here’s a few advantages of investing with Lending Club:

• Since June 2007, Lending Club investors have earned an average net annualized return of over 9%.
• Lending Club approves only creditworthy borrowers as members.
• Simple investing process:  Open an account, deposit money, select loans, collect principle repayments and interest.

I invite you to check out the features at Lending Club. Take advantage of this limited-time $50 bonus offer by signing up before August 15th, 2009, and be sure to enter the referral code “FrugalDad” during registration.

Disclaimer:  My previous mentions of Lending Club have included affiliate links, but this one does not. If you do choose to invest, I won’t make anything from your sign up, and you’ll get $50. I will earn a referral if you decide to sign up as a borrower, and once you are a member, you will have the same opportunity to refer others.