Top 10 Investment Mistakes

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.

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