Some investors assume that an advisor is competent and ethical if she has a lofty title (financial consultant, vice president, and so on), dresses well, and works in a snazzy office. Such accessories are often indicators of salespeople — not objective advisors — who recommend investments that will earn them big commissions that come out of your investment dollars.

Additionally, if you overtrust an advisor, you may not research and monitor your investments as carefully as you should. Figuring that Mr. Vice President is an expert, some investors go along without ever questioning his advice or watching what's going on with their investments.

You should also question authority elsewhere in the investment business. Too many investors blindly follow analysts' stock recommendations without considering the many conflicts of interest that such brokerage firm employees have. Brokerage analysts are often cheerleaders for buying various companies' stock because their firms are courting the business of new stock and bond issuance of the same companies. And just because a big-name accounting firm has blessed a company's financial statements (Enron) or a company's CEO says everything is fine (Bear Stearns) doesn't make a firm's financial statements accurate or its conditions sound.

Feeling strength and safety in numbers, some investors are lured into buying hot stocks and sectors (for example, industries like technology, health care, biotechnology, retail, and so on) after major price increases. Psychologically, it's reassuring to buy into something that's going up and gaining accolades. The obvious danger with this practice is buying into investments selling at inflated prices that too soon deflate.

In the U.S. stock market by the late 1990s, investors were getting spoiled with gains year after year in excess of the historic average annual return of 9 to 10 percent. Numerous surveys conducted during this period showed that many investors expected to earn returns in the range of 15 to 20 percent annually, nearly double the historic average. As always happens, though, after a period of excessively high returns such as those of the 1990s, returns were below average in the subsequent period beginning in 2000 (and were quite negative in the early 2000s). During the market slump in the early 2000s, real estate-related stocks continued to do well; some folks mistakenly believed that the housing sector was immune to setbacks and were surprised by the slump in that sector in the late 2000s.

As I discuss in Part V, newsletters, books, and even some financial periodicals lead investors to believe that you can be the next Peter Lynch or Warren Buffett if you follow a simple stock-picking system. The advent of the Internet and online trading capabilities has spawned a whole new generation of short-term (sometimes even same-day) traders.

In my work as a financial counselor, I came across plenty of people who lost a lot of money after they had an early winner and had attributed that success to their investing genius. These folks usually landed on my doorstep after great and humbling losses woke them up.

Inexperienced or nervous investors may be tempted to bail out when it appears that an investment isn't always profitable and enjoyable. Some investors dump falling investments precisely at the times when they should be doing the reverse — buying more. Whenever the U.S. stock market drops more than a few percentage points in a short period, it attracts a lot of attention, which then leads to concern, anxiety, and in some cases, panic. Corrections in excess of 10 percent, such as happened in late 2007 and early 2008, lead to all sorts of hand wringing and gloom-and-doom talk.

Investing always involves uncertainty. Many people forget this, especially during good economic times. I find that investors are more likely to feel more comfortable with riskier investments, such as stocks, when they recognize that all investments carry uncertainty and risk — just in different forms.

Unfortunately, the short-term focus that the media so often takes causes some investors to worry that their investments are in shambles during the inevitable bumps in the road. As I discuss in Part V, the media are often to blame because they hype short-term events and blow those events out of proportion to captivate viewers and listeners. History has shown that financial markets recover; recovery is just a question of time. If you invest for the long term, then the last six weeks — or even the last couple of years — is a short period. Plus, countless studies demonstrate that no one can predict the future, so you gain little from trying to base your investment plans on predictions. In fact, you can lose more money by trying to time the markets.

Larger-than-normal market declines hold a significant danger for investors: They may encourage decision making that's based on emotion rather than logic. Just ask anyone who sold after the stock market collapsed in 1987 — the U.S. stock market dropped 35 percent in a matter of weeks in the fall of that year. Since then, even with the significant declines in the early 2000s, the U.S. market has risen more than sevenfold!

Although some investors realize that they can't withstand losses and sell at the first signs of trouble, other investors find that selling a losing investment is so painful and unpleasant that they continue to hold a poorly performing investment, despite the investment's poor future prospects. Psychological research backs this up — people find the pain of accepting a given loss twice as intense as the pleasure of accepting a gain of equal magnitude.

The investment world seems so risky and fraught with pitfalls that some people believe that closely watching an investment can help alert them to impending danger. "The constant tracking is not unlike the attempt to relieve anxiety by fingering worry beads. Yet paradoxically, it can increase emotional distress because it requires a constant state of vigilance," says psychologist Dr. Paul Minsky.

In my work as a financial counselor, I see that investors who are the most anxious about their investments and most likely to make impulsive trading decisions are the ones who watch their holdings too closely, especially those who monitor prices daily. The proliferation of Internet sites and stock market cable television programs offering up-to-the-minute quotations gives these investors even more temptation to overmonitor investments.

Investing is more complicated than simply setting your financial goals (see Chapter 3) and choosing solid investments to help you achieve them. Awareness and understanding of the less tangible issues can maximize your chances for investing success.

I know plenty of high-income earners, including more than a few who earn six figures annually, who have little to invest. Some of these people have high-interest debt outstanding on credit cards and auto loans, yet they spend endless hours researching and tracking investments.

I also know many people who built significant personal wealth despite having modest-paying jobs. The difference: the ability to live within your means.

If you don't earn a high income, you may be tempted to think that you can't save. Even if you are a high-income earner, you may think that you can hit an investment home run to accomplish your goals or that you can save more if you can bump up your income. This way of thinking justifies spending most of what you earn and saving little now. Investing is far more exciting than examining your spending and making cutbacks. If you need help coming up with more money to invest, see the latest edition of my book Personal Finance For Dummies (published by Wiley).

Saving money is only half the battle. The other half is making your money grow. Over long time periods, earning just a few percent more makes a big difference in the size of your nest egg. Earning inflation-beating returns is easy to do if you're willing to invest in stocks, real estate, and small businesses. Figure 20-1 shows you how much more money you'll have in 25 years if you can earn investment returns that are greater than the rate of inflation (which is currently running at about 3 percent).

As I discuss in Chapter 2, ownership investments (stocks, real estate, and small business) have historically generated returns greater than the inflation rate by 6 percent or more, while lending investments (savings accounts and bonds) tend to generate returns of only 1 to 2 percent above inflation. However, some investors keep too much of their money in lending investments out of fear of holding an investment that can fall greatly in value. Although ownership investments can plunge in value, you need to keep in mind that inflation and taxes eat away at your lending investment balances.

Figure 20-1. Slightly higher returns compound to really make your money grow.

Stock market declines, like earthquakes, bring all sorts of prognosticators, soothsayers, and self-anointed gurus out of the woodwork, particularly among those in the investment community, such as newsletter writers, who have something to sell. The words may vary, but the underlying message doesn't: "If you had been following my sage advice, you'd be much better off now."

Clearly, in the world of investing, the most successful investors earn much better returns than the worst ones. But what may surprise you is that you can end up much closer to the top of the investing performance heap than the bottom if you follow some relatively simple rules, such as regularly saving and investing in low-cost growth investments. In fact, by doing so you can beat many of the full-time investment professionals.