Hindsight is 20/20, especially when it comes to investing. I was just recently texting with a buddy of mine about this. We traded investing fails back and forth and had a good laugh. In thinking of some of my hits and misses, most errors made were from a lack of experience and knowledge. Here are a few things I’ve learned along the way that will hopefully provide some benefit to novice investors and help avoid investing mistakes.
Investing Too Conservatively While Young
Man I wish I could hop in a time machine and change my investment allocations around the year 2005 range. I pretty much did the opposite of what a young person should do with one exception. I did start and grow a decent emergency fund. My mistakes?
Well I invested in bond funds, and very conservatively at that. That’s the polar opposite of what 10/10 financial advisors would recommend for a person in their early 20’s I’m sure. I believe I invested just enough to get the employer match. I remember not really trusting the stock market at that point and didn’t want to risk losing any money. The market isn’t for everyone, but as much as I enjoy investing now, I can clearly call this a mistake.
Investing In Penny Stocks
So let’s fast forward several years. I got my work investment accounts straightened out and discovered a new found interest in the markets. Deciding it was time to invest more, I opened a Scottrade account and sent them a few hundred bucks. For some reason I was attracted to this 5 cent stock that was seemingly predictable in movements. I watched it for a few weeks and it was moving up and down like clockwork. So having a seemingly good feel for the bottom I decided to go for it.
Fortunately my conservative ways helped me here as I learned a quick and fairly inexpensive lesson. I didn’t lose too much when my wonderful plastic company from India went from 5 cents per share to 0 cents. Lesson learned, I will never invest in another penny stock!
Buying High, Selling Low
After that penny stock fiasco, I turned to my attention to legit, successful companies. Brilliant right? We’re on our way to riches now…..Well not exactly that easy. There is a little something called valuation. You can buy stock in the best companies in the world but if you don’t get them at good prices, it is a bad investment. It really pays to do your homework before hand before making rash purchases. In fact, I keep AT&T around to remind me of that lesson. I still haven’t got back to even after I purchased it high a couple of years ago. Fortunately the high yield softens the blow somewhat.
On the flip side, I’ve had a few stocks that I’ve sold way too early. I lost patience before they were able to take off and run. One big example is Tesla. I purchased that one in the low $100’s and now it is $350ish. I sold before it hit $200 unfortunately.
As a big fan of dividend investing, it is easy to fall in love with stocks that offer a big juicy dividend. I mean who doesn’t love a yield of 7, 8, 9 percent? Well, sometimes this can be a big red flag. Often the companies that are plagued with debt are the ones offering these big dividends. Take Kinder Morgan for example. The company was a dividend dream. I believe they were up to a 6 percent or so yield when the CEO said the company was in great shape and the dividend payouts wouldn’t be touched. They were building and adding pipeline like crazy. The only problem was they were taking on loads of debt.
It wasn’t long before energy prices took a big hit and they had to cut their dividend by 75%! Their actual stock price got trimmed also basically in half. You guessed it, I was one of those investors! Well this one did piss me off so I did sell and didn’t look back. It wasn’t so much that the dividend was cut but I felt misled by the head of that company. The trust was gone so I had to move on.
These days, I much prefer dividend yield in that 3-4% range. That way you can still get a little growth and there is usually less volatility.
Not Understanding Your Investments
If you are going to hold individual stocks, it is crucial to do your homework and actually be knowledgeable about the company. Not that long ago, I invested in a pharmaceutical company with a great reputation and a nice dividend. Has an excellent history and I didn’t see any red flags.
Literally days later after the purchase, the stock got slammed, down 12% after their cancer drug had disappointing results. I didn’t realize they were so heavily dependent on just a couple of products. This was me not doing the research needed. And typical bad luck.
I will add it also pays to know how a particular stock trades. Some have routine patterns over the course of years (not weeks like my penny stock fiasco above). I can think of a couple in the oil sector for example because I follow the industry closely and am aware of their cyclical nature. Know your entry price and avoid buying high like mentioned earlier. It makes a big difference.
Investing Mistakes Happen, Plan Accordingly
I’m not naive enough to think these investing mistakes will be the last ones made. All you can try to do is learn from the mistakes and try to be wiser as time goes on.
Or just say the hell with it and throw your money in index funds hah!
Reader Question- What investing mistakes have you made through the years? Thank you for reading!