I’ve received some questions concerning the biggest “rookie mistakes” investors make. I thought I’d take time to address this in today’s article.

Perhaps the single biggest mistake rookie investors make has to do with trying to be “too clever” by shorting the market on a regular basis.

“Shorting the market” means betting on a collapse in stock prices. And the reality is that it’s something you should RARELY do.

Why?

Because the vast majority of the time, stocks go UP!

When you are in a bull market like the one we’re experiencing today, stocks RARELY if ever drop in significant fashion. Sure, you might see a 10% decline here and there. But an outright CRASH is more like a once-in-a-decade event.

So why do so many investors like to bet on crashes?

Because of the Great Financial Crisis of 2008. The downside move during that event scarred a lot of investors.

But it also made BILLIONS for a handful of hedge funds who had bet on the crash.

And thanks to the books and films that have glorified these players (The Big Short movie for instance) an entire generation of investors has come to believe that the road to riches in the markets comes from being extremely negative and betting on a crash.

This is a DISASTROUS manner of thinking.

Here’s the Reality…

In any particular week stocks rally 56% of the time. Put another way, MOST of the time stocks are going up, NOT down.

Moreover, on average stocks have historically returned 7% or more per year. This means that even when you account for crashes, historically the gains from owning stocks have been so large that the average return is 7% — the highest for any major asset class.

So, when you bet on a crash, not only are the odds against you, but you are betting on an extremely rare event (again, crashes usually happen, at most, once every few years).

Let’s look at this from another perspective. In any given market crash, perhaps a handful of traders make money while thousands — if not millions — of investors lose money. What are the odds of you being someone who makes money during a crash?

The entire purpose of investing is to MAKE money. So why wouldn’t you invest in such a way that the odds are in your favor?

With this in mind, as an investor it pays to bet on stocks rallying for the most part. It’s easier, far more likely to be profitable, and causes a lot less stress.

Best Regards,

Graham Summers
Editor, Money & Crisis