The biggest investment mistake of my life came early. In 2006, I was 21 years old sitting on a few thousand dollars of life savings. The stock market was going up and I wanted in. At the time, I was an overconfident finance major, who read a few books on how to beat the market. Even worse, I began watching Jim Cramer and other shows on CNN.
To get started, I asked my dad. My dad, who himself has never invested any significant money in the stock market, sent me to an investment advisor friend of his. I called the advisor and we arranged a meeting when I was to return home from school. Until the meeting with the adviser, I developed a strategy based on a few books I read and what I had been hearing on T.V. My plan was to invest half of my savings in individual stocks and the other half in mutual fund.
I sat down with the adviser, he explained to me his services, the research tools I was granted access to by becoming a customer, and the costs of investing through him. I was convinced that there was no way I could loose. With my strategy and his expert advice, I was going to be rich. I wrote a check later the day, dropped it off at his office, and by the next day I had my online account set up.
Looking back there were numerous mistakes I had made, here are the biggest…
For a flat fee of $500 a year, I could trade all I wanted. For whatever reason, I thought I was going to make more than 50 trades a year, so this was a good deal.
On top of the flat free for trading, there was a monthly account management fee. It was just a small percentage of my assets, so I thought it was no big deal.
On top of everything, the mutual fund also has management fees.
Since I didn’t compare this to anywhere else, I thought this was normal.
I was cocky college finance major. I thought I could evaluate a business in an hour on Yahoo! Finance. The stock market was going up and I wanted in. My goal was to make a lot of money. That’s it.
I was investing in taxable accounts, with a strategy that required high turnover. I could have at least been investing in a Roth IRA, but I didn’t know what that was.
The individual stocks were in different sectors, I thought that is what it meant to be diversified. Plus, the mutual fund, which was the best returning fund the previous year, had a combination of 30-40 different stocks in it. It wasn’t until I discovered index funds that I found out what diversification really was.
It’s a little ironic that this whole situation, led me to pursuing the path of a financial planner. I passed Certified Financial Planner® exam in November of 2009. I plan to own my own fee-only practice soon.
As for my investments, I now have a purpose for every dollar of my savings. My costs are minimal. My investments are tax-efficient. Since I’m in index funds or target date retirement funds, my total time spent monitoring my investments is about 15 minutes a month.
I started out as a gambler and became an investor. It turns out, I make a lot more money and get a lot more sleep, being an investor.