Over the past 20 years, the S&P 500 has averaged a gain of 9.02%. But over the same span, individual investors averaged a return of just 2.53% per year.
That's an average annual return 6.49 percentage points less than the broader market.
Why the huge disparity? There are a couple things that get in the way of healthy, reliable wealth creation.
First, bad natural habits.
"It turns out that every investor is hardwired to do three things that kill returns," said Money Morning's Chief Investment Strategist Keith Fitz-Gerald. Fitz-Gerald has helped countless investors over his 33-year career, and seen the same mistakes over and over.
And he knows how to fix them.
"If you understand what these costly behaviors are, recognize them in yourself, and learn how to eliminate them, you can build wealth much more quickly."
That brings us to the next roadblock to financial health: employing the wrong investment strategy.
When investors don't have a plan, they set themselves up to underperform. For example, DALBAR research shows individual investors who try to time the markets have seen a measly 1.9% average gain over the past 20 years – even less than the average investor return in the chart to the right!
That's why we want to help you avoid these wealth-building mistakes in 2015.
With this guide, you can eliminate the issues separating you from bigger returns, adopt the best investing strategy you have ever used, and get yourself into the healthiest financial shape of your life.
We also give you five stocks to get you started on your path to better investing. We collected these picks from Fitz-Gerald and our full team of ten investing experts, who, combined, offer more than 250 years of market experience.
Let's get started. First, here's a look at three of the most common investing mistakes to stop making today…
Bad Investing Habit No. 1: Emotional Investing
One of the biggest errorsinvestors make is letting their emotions get the best of them. This leads them to focus on short-term market movements, and distracts them from long-term wealth-building plans.
"I chalk it up to the fact that human memories tend to focus on recent events more emotionally than they do longer-term plans that are put together with almost clinical detachment," Fitz-Gerald said. "Simply put, recent knowledge overrides longer-term thinking and memory. And the more extreme the events or the news, the sharper our short-term focus becomes."
When investors frequently take quick actions based on a major news story or event, the effects on their money can be disastrous.
"Think about what happened on 9/11," Fitz-Gerald said. "Most of the world's major markets bottomed within minutes of each other on short-term panic and emotion. Then, when trading resumed days later, they began to climb almost in sync as highly localized events once again faded into the longer-term fabric of our world."
That leads right into the second habit to avoid…
Bad Investing Habit No. 2: Following the Crowd
"Humans would rather be wrong in a group than right individually," Fitz-Gerald said. "So the vast majority of investors tend to make decisions, and mistakes, en masse."
We see this when investors sell low and buy high. Rather than analyzing the situation, they find safety in numbers.
"We see this in a phenomenon known as "chasing returns" or following the hot money," Fitz-Gerald said. "This is why annual performance issues like those published in Forbes, Money Magazine, or Kiplinger's, for example, are so irresistible. And so dangerous."
This occurred in the fall of 2014, during the height of the Ebola crisis. Through October, more than 10,000 cases of the disease had been reported worldwide. Rumors flew about which biotech company would be first to release a vaccine.
When news broke that Tekmira Pharmaceuticals Corp. (Nasdaq: TKMR) was given clearance by the FDA to test a vaccine in Ebola patients, the stock soared 40% in three days. But since peaking at $29.93 on Oct. 3, it is down 50%. Investors who bought high saw their initial investment cut in half in about two months.
Following the crowd means failing to stick to your own economic interests, which is a dangerous move.
That brings us to the fear factor…
Bad Investing Habit No. 3: Letting Fear Win
The markets have been incredibly turbulent over the last three months. In October, the Dow dropped 6.7% from September highs. Over the next six weeks it climbed 11.3%. Another 3% dip took place between Dec. 5 and Dec. 17.
"Right now millions of investors are sitting on the sidelines completely paralyzed by plain old-fashioned fear," Fitz-Gerald said. "And who can blame them? These markets have been some of the most vicious in recorded history."
Many fearful investors park their cash on the sidelines when stock prices go haywire. Or they lack the confidence to pull out of a losing position before the price goes down even more. The fact is, investors who are afraid of getting hurt by the market hurt both financially and emotionally.
"That's why people are more likely to let a losing position go against them than they are to take profits – because they can't take the 'pain' of being wrong," Fitz-Gerald said. "The fact that they are unprofitable becomes almost irrelevant."
"That's why I do everything I can to enforce the discipline of taking profits and minimizing losses in careful concert with an overall plan."
But you don't have to make these same mistakes. In fact, if you follow this one investing strategy in 2015, you'll be immediately on the right track to healthy wealth-building…
The Single Best Investing Strategy for 2015
When it comes to protecting your money, and growing it, discipline is the biggest key.
That's where Fitz-Gerald's 50-40-10 structure allocation comes in. He pioneered the strategy for his publication Money Map Report, and it offers protection as well as huge upside.
Here's how it works:
- 10%: Investors place 10% of their capital in "Rocket Riders," or small cap stocks with huge upside. These picks are either riding a huge trend, preparing for a major IPO, or are prime takeover targets.
- 40%: Next, Fitz-Gerald targets globally recognized brands with strong balance sheets and high cash flow. They also pay high dividend yields. Investors should use 40% of their capital on these.
- 50%: Finally, investors place 50% of their investments in foundational plays. These are defensive positions that hold their value in any market conditions. But these offer upside as well.
This allocation ensures discipline, but also leads you to tremendous gains.
"By concentrating assets and periodically rebalancing between core assets, growth/income, and speculative positions, you are effectively "forcing" yourself to buy low and sell high using proven logic – not emotion," said Fitz-Gerald. "Plus, this keeps performance-robbing fees low, which Wall Street hates but you'll love because it can add a lot to your returns over time.
"The other thing to think about is that you'll sleep well at night even if the markets pitch a hissy fit because the concentration and built-in protection it offers ensure you're high on stability and upside at the same time."
Dollar-cost averaging means you split your money into chunks instead of buying into a position all at once. It helps you avoid an overreaction based on a volatile day in the market. It makes investors focused more on the long-term upside potential and not short-term moves.
Best of all, DCA minimizes risk.
"I think splitting money up over a 3- to 5-month horizon is a good start because you can work your way in no matter whether the markets are moving up, moving down, or moving sideways," Fitz-Gerald said.
Another part of the strategy is using trailing stops.
Trailing stops are "stop-loss" orders that automatically take you out of an investment after it has fallen a designated percentage from its highest price. It lets you keep at least a portion of your gains and limit losses.
"Conventional wisdom tells you to sell your losers and let your winners run," said Fitz-Gerald. "I think that's backwards. Nobody ever made money by selling losers. You have to periodically sell your winners without interference, and trailing stops let you do that."
We typically recommend a trailing stop of 25% – although sometimes situations and sectors require a different amount.
Now that we have the strategy down, it's time to buy stocks. Money Morning delivers new investing ideas every day to Members. You can get started today with five of our favorite picks for 2015…
Editor's Note: With one daring stroke, this company just made an out-of-the-blue move to control $15 trillion in new wealth. And they did it under the nose of Wall Street and Washington regulators. The amazing thing is – their master plan is working. And in 2015, it could make you rich. Find out about it here.
Boost Your Returns in 2015 with These 5 Stocks
Stocks for 2015 No. 1: Ford Motor Co. (NYSE: F)
Ford will benefit from major automotive industry growth in 2015.
According to a new forecast by TrueCar, U.S. sales of new cars and trucks will rise 2.6% to reach 17 million units in 2015. That's the market's biggest growth total since 2005. It also follows an impressive 2014 in which combined U.S. sales of new and used vehicles rose approximately 8.3% to $1.1 trillion.
The U.S. economy will also drive Ford stock. Analysts predict the economy will grow by at least 3% in 2015, after it was up 2.2% in 2014. Kiplinger's magazine is predicting global growth of 3.2% this year as well.
Money Morning's Executive Editor Bill Patalon recommends Ford now to his readers as it trades near $15. It has a 3.4% dividend yield and is expected to increase earnings by 44% in the full-year 2015.
Stocks for 2015 No. 2: Alibaba Group Holding Ltd. (NYSE: BABA)
Alibaba was the biggest IPO story of 2014, climbing 53% from its offer price through the end of the year.
But 2015 is looking like a huge year for the company, too, as it continues to expand internationally. At the time of the IPO, Founder Jack Ma said he plans on expanding further into the U.S. market. He wants Alibaba to be "bigger than Wal-Mart."
According to Reuters, just 9% of Alibaba's sales come from international markets. Focusing on the U.S. market would change that.
"Jack Ma impresses me," Patalon said. "He's on a mission to form a global company. You're going to start seeing more purchases across different industries and it's going to look like a puzzle with all the companies he's adding."
Watch for the company to expand in 2015 and increase its already strong revenue figures. In its last earnings report Alibaba had revenue $2.64 billion, up 54% year-over-year.
"I think Alibaba is going to see $3 per share in earnings next year, much higher than the $2.20 analysts now expect on average," Fitz-Gerald said.
Stocks for 2015 No. 3: Apple Inc. (Nasdaq: AAPL)
Apple stock offers huge upside in 2015, even after it gained 38% in 2014.
Apple is set up for record profits this year. Sales of the iPhone 6 show no signs of letting up, and the company has a completely new product category on the horizon in the Apple Watch. It also has enough cash – $155 billion as of Sept. 30 – to finance its visionary strategy for years to come.
Most signs point to the Apple Watch arriving in spring 2015, and sales should be huge. Analyst sales estimates vary widely, between 10 million units and 30 million units in the year. At a starting price of $349, we estimate the Apple Watch will add at least $4.5 billion in new revenue.
Money Morning Defense & Tech Specialist Michael Robinson has a $142.85 target on AAPL stock, the equivalent of $1,000 a share before the 7-for-1 split that took place in 2014. AAPL shares opened 2015 at $111.39.
"I definitely would not be sitting on the sidelines watching AAPL continue to go up," he said.
Stocks for 2015 No. 4: Ambarella Inc. (Nasdaq: AMBA)
Ambarella was first recommended by Robinson on Aug. 2, 2013, and since then it's up 270%. And this stock has room to double again.
Ambarella is riding the wave of wearable technology. The company's products are used in GoPro Inc.'s (Nasdaq: GPRO) Hero cameras. By 2019, BI Intelligence estimates that 148 million wearable-tech products will be sold globally. AMBA also has its chips in the backup and dashboard cameras in vehicles. In 2018, the U.S. government will begin mandating these cameras in all new cars.
Ambarella has beaten earnings estimates by an average of 28.5% in the last four quarters. Next quarter, Ambarella is expected to report earnings growth of 88.4% from last year. Analysts predict revenue will jump 34.9% in 2015.
Over the last three years, AMBA has had average annual sales growth of 27%. In its last quarter, sales were up 43%.
AMBA stock opened today at $52 and is up 75% in the last 12 months.
Stocks for 2015 No. 5: Technology Select Sector SPDR Fund (NYSE: XLK)
XLK is an exchange-traded fund that covers a wide swatch of technology, mostly U.S. leaders. It's one ofMoney Morning's Defense and Tech Specialist Michael Robinson's favorite investments now.
"With more than 70 stocks in its portfolio, the fund offers investors the chance to specialize in high tech," Robinson said. "It's also diversified across multiple sectors, including Internet services and software, information technology consulting, semiconductors, computers, peripherals, wireless services, and cybersecurity."
Apple Inc. (Nasdaq: AAPL) is the fund's biggest holding at 16.3%. In the last 12 months, AAPL has gained 39.5%. Intel Corp. (Nasdaq: INTC), Facebook Inc. (Nasdaq: FB), and Microsoft Corp. (Nasdaq: MSFT) are all major holdings as well.
In the last 12 months, XLK has gained 14%. It also yields 1.8%.
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