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Want To Avoid Losing Money In Stocks? Do These 5 Things

Carl Gustav Jacob Jacobi is a German mathematician who was born in the early 19th century. He has a reputation as one of the finest mathematicians the world has ever known. But just why would a math wizard appear in an investing article here?

Thing is, Jacobi has a phrase that’s oft-quoted by investing maestro Charlie Munger and that is, “Invert, always invert.” Jacobi believed that problems are best solved when inverted. I believe this applies to investing too.

So, instead of asking “What should I do to make money in stocks,” a better question could be “How should I avoid losing money when investing?”

To answer the latter question, below are five things we can do. While the list I have here is not an exhaustive ‘how-to’ on minimising your odds of losing money while investing, it’s still a good place to start.

For the first four things, head here.

5. Avoid trying to time the market

Timing the market is the act of buying and selling financial assets in the hopes of profiting from troughs and peaks, respectively. It sounds like an attractive thing to do, but when you look at the evidence, timing the market is quite clearly a recipe for disaster.

Investing research outfit DALBAR has been publishing a series of reports for years now which include a comparison of U.S. stock market investors’ returns versus that of the market. Here’s a chart that my colleague John Maxfield had made using data from the DALBAR studies:

Graph of investor's returns versus the S&P 500
Source: John Maxfield, Fool.com

The chart shows the annualised returns for the average U.S. equity fund investor over rolling 20 year periods from 1998 (20 years ended 1998) to 2013. It also plots the same type of return for the S&P 500, a stock market benchmark in the U.S. akin to the Straits Times Index (SGX: ^STI) we have here in Singapore, for the same time periods.

As you probably have already noticed, the average equity fund investor’s performance badly lags that of the stock market. And the reason why that’s so, is because investors had bought and sold their investments at all the wrong times.

If you think it is only mom-and-pop investors who should not try market-timing, you’d be mistaken – even the pros can get it horribly wrong too.

John Hussman is a striking example. He runs the Hussman Strategic Growth fund in the U.S., a fund which has lost 3.52% per year over the past decade, according to Morningstar. Over the same time frame, the S&P 500, even without accounting for dividends, has climbed by 4.8% annually.

The Hussman Strategic Growth fund’s outrageously poor performance has largely been a result of Hussman’s bets over the past six years since 2009 that the stock market would fall.

Some of you might realise that 2009 was the year when many stock markets across the globe (such as in the U.S., UK, Australia, and even Singapore) had bottomed-out and rebounded strongly after collapsing during the global financial crisis that started in late 2007. Hussman, in his attempt to time a further fall in the market after the crisis, has cost his investors very dearly.

Peter Lynch, the legendary manager of the Fidelity Magellan fund in the U.S., once said that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” That’s a case against trying to time the stock market, and it’s a case we should all keep in mind, given the evidence we’ve seen.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.