This weekend I’ve been asked to share some thoughts on personal finances in a forum setting. They’ve asked me to share about investing and giving. I’ve shared a bit on my blog about giving so I thought I’d highlight some of my hard lessons about investing. I think overall, I’ve done pretty well, but not great. If I had to do it all over again, I’d definitely do some things differently. So, here are my top 10 investment mistakes from experience:
1) Paying high expenses for financial advice or active management. The thing that just drives me nuts are the high expense ratios you see in mutual funds and high expense fees charged by financial advisers. Are you kidding me?! It’s a total sham, they have to beat the market in order to justify their higher fees and to be honest not everyone can beat the market, right? There is an average return, your adviser generally is not smarter than the collective whole of the market unless you are Warren Buffett, and in that case, why don’t you just buy shares of Berkshire? If you’re really lazy, just buy ETFs and call it a day. You don’t have to do your homework and you can just get average returns without the high fees. Buying mutual funds with high expense ratios is just plain dumb.
2) Timing the market. Ok, I’ve done this a few times and have gotten skewered for it. What did Benjamin Graham say? The market is a voting booth day to day, but it’s a weighing machine in the long-term. If you’re investing in a fundamentally sound company with growth prospects allow it to have the daily swings as long as it’s a fundamentally sound company and in the long run you’ll be fine. When I try to time it by guessing where the public winds might land, I get totally skewered and at its base level - it’s gambling.
3) Not setting goals. What are you investing for? Why are you investing? If you don’t know the answers to those questions, you won’t like the outcome. When I was investing during grad school and literally day trading during class breaks, I never set a goal, it was 1999 and every trade seemed to be profitable. It was crazy. I thought I was a smart dude since my trades were profitable and I really had no goals, I thought it would go on forever. Had I set a goal of paying off grad school, or buying a house, or saving XX amount for retirement - I may have been able to get out of the game and not sustain the losses I took in 2000 and 2001. Set your limits or your goals.
4) Leveraging your investments, generally. Borrowing money to invest in the stock market is generally not a great idea. Borrowing money for education, primary home (sometimes) may be a better idea. I made the mistake of going on margin, playing with options to drive higher returns. It’s plain stupid, most people will lose money investing this way. Have you heard of Gambler’s Ruin? The theory is that the person with the least amount of money will always hit ruin eventually. You can’t beat the market with excess returns without taking excess risk. One excess bet can lead to total destruction of your capital. Don’t be greedy, fat pigs get slaughtered.
5) Buying stocks based on casual conversations. Ask yourself, how many times have I made money following tips from friends? I have a rule now, if I hear a tip, I start doing the opposite. It’s scary, I’d be sipping martinis on the beach right now if I always did the opposite of what my friends told me was a hot tip. Here’s the thing, if your friend had the hot tip and it was known by the public, it would be priced into the stock which would be a fair price, if it wasn’t known by the public, then it’s unethical and you can go to jail. If it’s a gut thing or a great story, then run the other way.
6) Putting your money to work at all times. This is absolutely the worst advice I’ve ever heard. If you had just sat on the sidelines last year and put your money in treasuries, you would have kicked butt. Don’t be in a rush to put money to work, be patient. Cash is the new asset (at this time), tomorrow your cash will buy more real estate, more stocks, etc. Be patient. Every time I dipped my toes in to buy, I’ve been hurt. Wait a little, be patient, and be ready - I’m not advocating market timing to try to find the bottom, just relax and take your time.
7) Getting rich quick. I am a very skeptical guy when it comes to investment pitches, but every once in a while even I get snagged to think about an opportunity with excess returns. If there is anything I can shout to you now, THERE IS NO FREE LUNCH! Excess returns generally require excess risk. Excess risk means you usually lose money. I’ve invested in some ridiculous gold scheme once and never again. You’ll probably get taken at least once, but don’t ever let it happen to you twice. One more time - there is no such thing as excess returns without excess risk!
8 ) Thinking that paper gains is the same as cash. As we all know now, those home values can disappear very quickly. Never run your “personal business” thinking that you have more cash than you actually have. Run conservatively and don’t spend more cash than you have. All common sense. A common side effect if you think paper gains are cash is that you easily get too attached to the paper value and easily get bummed out when it starts dropping in value. It’s valueless until you sell it. Either sell it and move on, or stop thinking about it. Man, I’m still struggling with this one… Ugh.
9) Watching CNBC.
10) Not maximizing your tax advantaged investments. If you can contribute to your Roth IRA, are you maximizing that? Does your company match 401K, if so are you maximizing it? It’s a free lunch. Do you keep your higher return/higher risk investments in your Roth and 401K and lower risk in your taxable portfolio? I can’t mention how many times I’ve missed these opportunities.
Full Disclosure - I’m currently about 2% in equities. I’m terribly bearish about the market and am pretty happy staying on the sidelines. We’re in for a long winter. This post as with all my posts are my opinion only and not intended as financial recommendations or advice. Make your own decisions and live with the outcome. Be smart.
Now feel free to let me have it in the comments!
11. Trusting your financial adviser, who was a friend, to help manage your money.. Especially if he turns out to be an ignoramus.. (and, no, I am not bitter, really)
when it comes to business, find the best person to do the job - friend or not.
Yes.. we trusted a friend without adequate evaluation.. live and learn.. very expensive lesson, to say the least, but it’s only money..
Answers #2 and #6 seem to contradict each other. I agree that had I sat out the market last year, I would not have sustained the losses I had. However, how does one know when we have reached bottom and it is time to re-enter the market?
Ron - thanks for the comment. I can see how it seems to contradict each other - what I meant with #6 is that we shouldn’t feel pressure or feel anxious about putting money to work right away. Taking the time to think about your strategy is better than going quickly, there will always be deals to be had. Hope that makes sense.
Some very good tips in this post. Congratulations!
Always check out the results of your financial advisor’s advice before you sign a contract with her. The financial advisor for our company’s 401k program is only out to get his own fees not choose the right funds to make money for the employees who invest there. We’re stuck with lousy funds and a go nowhere investment vehicle. The only money we earn is from the employer’s matching money (see article statements on this).
Another bad experience is when I invested in Asia Pacific stock. Lost a bundle in the tech crash. Later learned that the head honcho was a good buddy of Bill Clinton — if only I’d known sooner. So my advice is to steer clear of companies who are intimately connected to Presidents.
Then we are going to be in real trouble with this administration!
a great tip is to always ask how a financial adviser actually gets paid. if they are not transparent about it, run the other way.
Glad that you posted this Andy, good to see what others are doing. I’ve found that setting goals and revisiting those goals regularly has been my biggest motivator. 2009 is a “go to work” year for me.
thanks for the comment, michael. it is so easy to run without goals.
I’ve been investing since I was 16. I come from a family of financial advisers, so it was kind of hard not to. The biggest thing you can do while investing is play time in your favor. If you pick out any twenty year stretch in the history of the stock market, including the great depression, you’ll notice approximately a 12% yield on investments annually on average. Interesting thing to know. I have 40 years until retirement (what’s that?), so I should be able to realize that investment at a positive gain quite easily based on historic trends. That being said, never trust history. The future hasn’t been written yet.
good point.
Another lesson, investing is one of those things where time spent does not correlate to gains earned. You can spend five seconds picking an index fund and do as well as a churning and burning day/swing trader. You can spend hours reading financial statements and still fail because you missed macroeconomic factors that dominate anything on a balance sheet.
I think the key to investing lies with your #3 tip, goals. You need to have a time horizon (say, retirement) and then plan according to that. It’s far more reasonable to assume a 10% rate of return over 40 years, less reasonable to assume it over 20 years, and you’d be insane to assume it over the next 5 or 10. If you’re saving towards a house in five years, you probably don’t want it in the stock market.
Another thing to recognize is opportunity cost. You could spend hours a day researching the market, reading various economic reports, doing your due diligence… or you could spent two minutes, pick an index or target retirement fund, and then focus on your job. I think the ROI on your time for whatever you do for a living will dominate stock market returns, especially if you’re young and don’t have much committed to the market yet.
Finally, #11 should be that you should treat advisor like an advisor, not a mentor, not a leader, and not a soothsayer. They should educate, not direct where you should go. Anytime you put the decision making in the hands of someone else, you lose. If things go well, you have no idea why and you are at their mercy. If things go poorly, you take it 100% on the chin.
great point. you’re absolutely right about advisers, you shouldn’t abdicate responsibility for your portfolio just because you have one.
From the article: “I’m currently about 2% in equities”
I was almost to this point. There were days when I contemplated selling all my stocks and throwing the cash in money market funds/CDs/etc. Then I realized that, if I did this, I would probably buy back those same equities on their way up and forego a potentially large upside.
Now I have taken a considerably different approach. Every time the market falls 2 or 3 %, I buy a block of stock. I’m hoping to lock in these “low” prices and benefit with increased returns in the long run.
As a disclaimer, I’m only 30, so I have a long time for these investments to come back. Mileage may vary for those that are in their upper 40s+.
dollar-cost averaging is a great tip. thanks for sharing.
Great tips Andy.
I would say that you need to become a generalist in everything so people don’t scam you and do your homework. Don’t believe what others say, investigate it.
As Reagan said trust but verify.
absolutely. sometimes we’re blinded by good friends that were also blindsided as well and we get suckered into a “good” deal. trust but verify is always a good idea.
Invest in yourself.
This made more sense BEFORE, actually. It is still a good idea to learn skills, but there is no point in pursuing expensive education. The so-called RICH are going to be paying more and more tax. The only way to avoid being one of the big payers is not to earn so much money, and therefore, spending years and huge money on, for example, an expensive medical degree would just be nuts.
thanks for your comment - i don’t really agree with your comment since education is one of the best ways to generate more long-term income. avoiding taxes is never a great long-term strategy.
I lovee.. the cnbc comment.. lol
I agree. In the end, people have to remember that CNBC is still television. They are there to make money from a) entertaining you and b) getting paid behind the scenes by the companies they talk about.
caveat emptor (sp?) seems appropriate
You Hit the nail on the head!
agreed as well. CNBC is about creating headlines, things are worse than they really are or better than they really are. for us to keep watching doesn’t provide any real information.
CNBC may not be good for individual stocks picks, but for understanding the market and what makes this country work, they have it right. They are very down on the big spending Bush got us into, and when Obama says we had eight years of failed policies and we have to change, he has it right. Too bad his answer for this is……more big spending. If we don’t scream to our senators to vote down this bill, we are in for a long period where nothing rises in value, including our investments, no matter how carefully we follow the good advice given in this article.
Wow, that is truly amazing stuff. Well done!
RT
http://www.online-anonymity.at.tc
11. Not realizing 8 will turn into a smiley…
thanks anders, fixed
9) I only watch CNBC when the market goes up.
THen I feel really smart.
Nice one :-).
nice post, Andy! #9, watching CNBC. For me, i actually enjoy waking up and skimming through segments on this channel. Some of the commentaries and interviews are great, and there’s nothing better than watching it as a news station. But yeah, its when Ratigan and his Fast Money yahoos come along , followed by Cramer and his non-stop yapping, am i grabbing the clicker to scour reruns of Family Guy on some syndicate channel.
Solid advice all around from a self investor. I’m mostly on the sidelines now with a small portion in S&P500 ETFs.
(Sorry for two comments)
#9 I don’t really agree with though. Whats wrong with CNBC? As long as you don’t take anything they say 100% seriously (especially the interviews with Wall Street guys), it’s a pretty informative station. Just not helpful at all for investing reasons.
Media dramatization glamor et al ;-).
ITGraphic: I believe the Dow did 0% in nominal terms from 1929-1949.
#3, #5 and #6 are incorrect.
3) Setting a goal (in terms of a dollar amount) will not change the optimal investment. You’re just as likely to lose in the upside as you’re to save yourself from downside with this strategy.
5) Not as much incorrect as simply incoherent and irrelevant. You say that your friends have no special information, yet at the same time you say that betting against them would be profitable implying that they in fact do have actionable information.
6) Historically the majority of returns on indices has come in a small number of days. If you were not invested during those days you would’ve missed most of the upside.
I agree with some of these comments.
Heard of intrade?
No do you have a link for this?
Have you checked out gTrade?
gTrade global trading platform provides investors and venture capitalists a platform to trade equity in an open market for emerging and seed web 2.0 companies.
Do you have a link?
Nice blog.
I will read it later.
Excellent post. I couldn’t have said it any better. If folks pay attention they will benefit greatly from your excellent guidance.
I especially agree with #9 - CNBC does a disservice to the average investor. And before I hear it on that word choice - I mean the investor who’d at least like to keep up with the index averages… not the average investor who we’re always reading about (in Dalbar studies) who lagged the indexes by 8-10%.
:):):) - Dramatization by media
I like a lot of what you are saying here but I do think for long term seasoned investors there are always opportunities in the market. And that just as irrational greed takes worthless stocks right through the roof, irrational fear drags a lot of them below their long term worth. Examples in the current market scenario include HMC, SNE, WFC. But as you say one should always have a long term goal and view why they are investing in a particular market, stock or fund and for how long.
All of this tips are well taken except for no.9. Why watching CNBC is a mistaken? care to explain?
All facts aside.
Does the media really give any relevant news to you? not really
More importantly, if they were giving you stock tips that will make you instant money, WHILE majority of the population is watching the same program, wouldn’t we all be rich by now?
The media will not give out a ’secret” to the majority viewing.
Ah i see, so you think that every business channel like this should be closed because its just full of BS and wasting your time?! Anyway CNBC isnt really that bad, they monitor every stock market and gives you a noticement and awareness to what you invested on Stock market. But for not giving useful tips, yes they’re bad at it
The best one I’ve heard and learned the hard way from is “never catch a falling knife.”
I disagree with #6. Time generally leads to more and higher dividends. Compound interest is the most powerful force in the universe. Holding cash in a traditional checking or savings account is dangerous due to inflation. Buying a safe or putting your money under your mattress is even worse. If you do decide to have cash and wait at least put it in a high yield money market account.
Please let me know where I can find a good high yield money market account right now.. All the rates are pathetic.. On a long term horizon this works, but in the immediate term it will bite for the next several years.
In all honesty, I believe the best bet for a good to great return on your money right now is to put it to work in building something that is either a capital/tangible asset or a business to fill a need in the marketplace. I would rather trust myself and my motivation than some money market manager’s intuition.
All is IMHO and YMMV.
Cheers
Watching CNBC
Classic
This is a very helpful post. Practical and logical. Thanks.