There’s one very simple investing mistake millions of folks are making right now—and it’s costing them billions every year.
Of course, there are many boneheaded errors people make every day, like betting a lot of cash on a single stock. Or not having an investment plan.
While both of those will also drain your portfolio—and could even put your retirement on the rocks—neither is the most common pitfall you’ll find.
So what is?
Simple. Being scared.
That may sound strange, but hear me out.
Because fearful investors avoid risk, but they don’t realize that all investing involves risk. You might think putting your money in U.S. Treasuries is a risk-free bet; after all, the American government isn’t going to go bankrupt anytime soon!
But what about 2011, when the U.S. flirted with defaulting on its debt? And what about the fact that Treasury prices fall as interest rates rise? That can also cause massive losses.
Some extremely risk-averse folks will even avoid Treasuries, putting their cash in CDs or plain old savings accounts instead. That’s not risk-free, either; if the United States collapsed tomorrow, there’d be no FDIC to guarantee your money!
I’m not saying we’re on the brink of a calamity that will make all investments worthless. My point is that going on a futile hunt for a risk-free investment is a fool’s game. Because even if you leave your cash in a bank account or under a mattress, inflation is going to eat at the value of your savings.
When you accept that, you stop asking the wrong questions (“How can I protect my money? How can I avoid losing money?”) and start asking the right ones (“What are my financial goals, and can this investment help me reach them? What’s the reward I’m getting for taking on the risk of this particular investment?”).
How Fear Masked a Massive Income Opportunity
One of the best (worst?) examples of this big blunder happened quite recently.
Let’s go back to the early 2010s.
Back then, California was seen as one of the biggest fiscal train wrecks in the U.S. Pundits tossed around words like bankruptcy all the time. Despite a flood of profits pouring into Silicon Valley and Hollywood, bad governance and worse demographics were touted as reasons for the Golden State’s bonds to crater.
Of course, they did.
California municipal bonds were hit hard. Despite their tax-free status, which makes them popular in the high-tax state, they were selling for pennies on the dollar. I remember talking to a lot of investors who thought it was crazy to buy California bonds back then. And because they were scared, they stuck with cash instead.
Big mistake.
Fast-forward to today, and California municipal bonds are actually priced as less risky than U.S. Treasuries!
Anyone who bought back when the market was terrified made a killing.
Oh, and that’s much better than the -6% return you’d get on cash for the same period (since inflation has made the dollar 6% less valuable during those five years).
That doesn’t mean you should go out and buy CCA now.
Other funds have had a much stronger performance over the last five years.
How did they do it? Simple: these funds’ managers knew that the panic over California municipal bonds five years ago was a buying opportunity, so they bet big. And anyone holding these funds since then has reaped the rewards.
Tax-free municipal bonds. Nowadays, people are talking about Illinois in the same way they were talking about California half a decade ago. And, most likely, Illinois will prove the fear mongers wrong and recover. That’s how it usually goes in the municipal-bond market. Anyone who recognizes that and jumps in will make a handsome profit.
The bottom line: if you’re the kind of person who lets fear control your investing decisions, you’re making the biggest mistake an investor can make.
This article was written by Michael Foster from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.
