Sin #5: Copy Cat Investing & Linear Expectations

Some purchases are best made with the help of others. You dine at a new restaurant because you've heard great things. You check out a new boutique because your best friend got a fab pair of black pants there. Or you go to your friends for advice when you've gotten sick of your hair guy who continually keeps you waiting 30 minutes, then barks at you for being 6 minutes late one time. These are all perfectly sound methods for finding restaurants, stores and services. Just not for choosing your investments.

Picking individual stocks based on what other people are doing -- because of a "hot tip" or your buddy's "feelings" about the market will likely trap you in a cycle of irrational copycat investing. Even if your friend works for the company or in the finance industry! Why?

Turns out that even the fat cats aren't superbly skilled at predicting the market: a study of 47 gurus and their 3800 plus predictions yielded an average forecasting grade of 48%! Sure, some "passed" (none got over 70%), but less than 20 of them predicted the market better than I could by simply flipping a coin!

The HMW shouldn't be dejected by this information, nor should she necessarily rid herself of her financial advisor (more on how to choose one later). The important take-away here is that most people, even the majority of the experts, can't predict the market, much less a stock's direction with any real accuracy. And that's okay! Picking individual stocks is much less important than how your assets are allocated -- the percentage divvied up between stocks, bonds and other classes. And most crucial is having your money in the market for a long time.

So don't try to outsmart or beat the market with a copycat tip. Join it! And better yet, appreciate and embrace its volatility -- a non-linear ride is totally normal. This means you needn't worry about day-to-day ups and downs in the Dow or any other index. And definitely shouldn't sell or go to cash just because an investment is down! Remember Siegel's great words if you start feeling shaky: "It's time in the market, not timing the market" that matters most. A HMW invests as much as she can, allocates correctly, rebalances once a year, and let's her money do the compounding while she's out getting her nails done :)