Do Not Start Investing Until You Learn This

Do Not Start Investing Until You Learn This

One thing we all have in common is that we make mistakes. Maybe you made the mistake of taking back your ex or picking a fight with the biggest guy at the bar. These are pretty punishing mistakes but if you ask me, the worst mistakes relate to your money. However, no matter what the mistake, the key is that we learn from our errors and move forward and as such here are five investing mistakes I wish I knew when I started that you can use to make better financial decisions!

Mistake #1: Trying to invest like big money investors

No matter who you are, we all look up to others and want to emulate their actions. For me, I grew up playing hockey and would pretend I was my favourite player when I hit the ice. For others, they may want to grow up to be their favourite movie star or musician. Needless to say we all draw influence from those we look up to however when it comes to investing this isn’t always the best move to make.

You see, just like we look up to athletes and celebrities, those in the investing world tend to observe and often mimic investing efforts of those with the deepest pockets. It’s for this reason that people follow investing magnates like Warren Buffett and Ray Dalio so closely. They want to emulate these two men’s success and see their own financial wealth grow over time. Now, in many circumstances, emulating the actions of those who have succeeded before us makes a ton of sense but when it comes to investing, you need to tread carefully. Let me share with you the issue I ran into trying to invest like my financial role models and what approach I now take instead that has yielded me greater financial returns.

When I started to get serious about investing 5 years ago, I knew that I lacked the knowledge it would take to make wise investing decisions and as such I did what any millennial would do when they need to learn something: I watched YouTube. In fact, I began watching a ton of content around investing and over time I started to notice that most of these creators were heavily into individual stock investing and as such I followed suit. I began buying single stocks hoping to cash in on the same kinds of returns I was seeing the people I follow enjoy.

Now, you’re probably smart enough to realize that my plan to invest like the people I saw on YouTube didn’t pan out. It’s not that they weren’t sharing good financial advice but what I failed to realize is that they were in a much better position to succeed using this investing approach than I was. For starters, they have more money to invest which means that they could afford to buy a host of different stocks and achieve proper diversification which I wasn’t given the limited funds I was investing with.

Second, the creators I was trying to mimic had significantly higher levels of experience and knowledge about the market. This meant that they could easily determine the value of a stock and could better predict its future performance that I ever could. As such, for them, the strategy of buying individual stocks usually worked out but for an inexperienced investor like myself, this approach was a one way ticket to the red zone.

Fortunately, after losing thousands of dollars and realizing the flaws in my investing approach, I came to learn that when it comes to investing, you need to operate in your own weight class. This is to say that your investments should match your level of experience. I had no right to be investing in more advanced assets given I was new to the investing game and as such I shifted my approach to a simpler investing strategy of dollar-cost averaging into low-cost index funds. With index funds, I really don’t need to have a ton of market expertise to see solid returns nor do I have to spend hours a day researching and analyzing specific companies.

Overall, this is the approach that works for me however I would have never got to this point without having tried to mimic the investing decisions of those I look up to!

Mistake #2: Waiting to start investing

If you’ve been listening carefully, you will have noticed that I just said that I only really started to take investing seriously when I was 25 years old. Now, for some this may seem like I picked up investing early but I feel as though I have left a ton of money on the table by having pushed off investing until this point.

Now, don’t get me wrong, there is no wrong time to start investing. As the saying goes, “better late than never” however as the extended version of it says, “but never late is better” and this is true when it comes to investing. As you know, I spend a lot of time educating myself on wealth building strategies and the more I educate myself on this topic, the more I realize how much extra money I could have had if I had started investing as soon as I became the legal age to do so. Let me break down what I mean with an example.

As I said, I started investing at 25. Every month, I invest $1,000 into low-cost index funds. Assuming I invest this same amount from now until I am 65, at a 7% rate of return, I should have $2.6 million. Now, here’s the crazy part. If I would have started investing $1,000 a month from ages 18–27 and then never invested another dollar again, at 65 I would have ended up with about the same amount of money as I will investing $1,000 a month for the next 40 years. This is a testament to the power of compound interest and is admittedly one of my biggest investing mistakes.

Now, fortunately, this mistake can be somewhat remedied by contributing more to your investments every month, however you can never get back lost time. Therefore, don’t make the same mistake that I did and start investing as soon as you can if you aren’t already!

Mistake #3: Thinking I could time the market

Isn’t it funny that if you ask 100 people if they think they are smart, all 100 will say yes? I mean, I have yet to meet someone who admits that they aren’t the sharpest tool in the shed. Now, while I am all for people being confident in their abilities, the truth is that our perception of our knowledge and expertise can get us in trouble and this is certainly the case when investing.

Similar to the mistake I made thinking I could pick winning stocks like those I followed on YouTube, another embarrassing investing mistake I had made in the past was trying to time the market. I thought to myself, how hard could it be to simply buy a stock, wait for it to rise in price and then sell it? Well I came to learn that while doing so is simple, it definitely isn’t easy.

In fact, when I started to take my financial education more seriously, I came to learn that timing the market is actually incredibly hard to do and even professionals have a hard time navigating the volatility of the market.

For instance, for the year ending December 31, 2020, a study of actively managed funds found that active managers lagged market returns 57% of the time. Taking a step back, these same poor results have been seen for the past 20 years as just over 86% of the time, active stock fund managers have underperformed the S&P Composite 1500 index.

Now, I am not going to lie, even if I would have known these stats earlier in my investing career, I would still have likely tried my hand at timing the market because that’s just the type of guy I am. However, I’ve now been burned enough times to know that timing the market is a fool’s game and I don’t want to play the role of the fool any longer. As such, I now buy and hold and so far this approach has worked out extremely well!

Mistake #4: Being impatient

Looking back on my childhood, one of my most cherished memories was spending endless hours playing Pokemon on my Gameboy Color. Needless to say I was obsessed with this game and as such needed to catch them all. However, after struggling to find some of the harder to catch pokemon, I started to get frustrated and ended up buying a gameshark that I could use to enter cheat codes and fill up my Pokedex instantly. Now, while it was cool to have access to every Pokemon I wanted, this was indicative of a trait that would later down the road cripple my financial progression.

You see, as my Pokemon example demonstrates, I am not a very patient person, or at least I wasn’t up until a few years ago. Now, let me tell you this, impatience and investing do not mix well together. Sure, they both start with the letter I but that is as close as these two terms should ever get to one another because being impatient when investing can have extremely detrimental consequences.

As I’ve already said, I have tried to time the market numerous times to date. Why did I do this? Because I wanted quick wins and to see my portfolio rise as quickly as possible. Now, as you already know, my efforts to time the market failed and if I take a moment to pause and reflect, I can tell you that these poor decisions were derived from my lack of patience.

It’s this lack of patience that also sees us witnessing hoards of people investing in shitcoins or memestocks these days because they see these shiny objects as a path to greater wealth — even if they are more of a mirage than an actual oasis.

What I have come to realize and what most experienced investors will tell you is that the profits lie in the long-term. As such, you’re better buying and holding stocks or funds you truly believe in than trying to realize quick wins. What comes fast often goes fast too and when it comes to your money, you want it to be with you for a long-time and not just a good time!
Mistake #5: Misunderstanding investing fees

Alright so up until this point I have shared with you some very big investing mistakes that I’ve made in the past however one of the worst mistakes that you can make and one I made for quite a few years was underestimating the cost of investing fees.

You see, if you work with a financial advisor then you should know that obtaining their services does come with a cost and typically this cost is referred to as a management expense ratio. This expense covers the professional’s advice, the supervision of the fund and any administrative costs associated with handling your account or the fund at large. According to Morningstar, the average management expense ratio on an equity fund is 2.28%. Seems pretty inconsequential right? Wrong!

Here’s how I want you to view the true cost of working with a financial advisor and incurring these fees on a regular basis. Let’s say that this year you have a gross return of 6%. The market wasn’t that hot but you are still well ahead of inflation. At this point, you’re probably happy with your return, that is until you realize what you’re left with after all your advisor’s fees are taken off the top. In this case, using a rounded 2% fee, you would be left with a net 4% return. In other words, you would be giving ⅓ of your money to your advisor and only keeping what’s left.

I don’t know about you but this seems like a lot of money to be handing over to someone, who as I said earlier, likely won’t even be able to offer you greater returns than what a simple index fund could offer. In fact, things really hit home when I crunched the numbers on my own investments. As I said, I invest $1,000 a month and if I were to hand over 2% of my investments for the next 40 years, I would be giving up over $700,000!

Therefore, what I’ve come to learn is that minimizing my fees plays a huge role in achieving greater levels of wealth therefore if right now you’re investing, make sure to understand your fees if maximizing your money sounds like something you too want to achieve!

CONTRIBUTED BY Adam Del Duca

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