12 Investing Mistakes I’ve Made, and How You Can Learn From Them

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I’ve been investing since 1996. In the process, I have learned a lot, mainly from trial and error. I’d like to share my experience with you. Here are some of the mistakes I’ve made:

  1. Not investing soon enough — I have been working part-time since my first year at college in 1991. If I had known what I know today, I would have invested my money in an IRA from day one. But like many other young adults, I was thrilled to have money and to spend it all on things that I enjoyed — movies, games, electronics, etc. If I had invested just $2,000 per year while I was in college, that $8,000 invested in an S&P 500 index fund would be worth about $36,000 today.
  2. Not knowing the basics — When I finally began investing, my first move was to give my money to a full-service brokerage firm to invest for me. I didn’t know anything about stocks or mutual funds. I just knew I should invest money to make more money. This was a big mistake since each trade executed by my broker cost a lot of money. Also, the mutual funds they picked weren’t good, and were very expensive.
  3. Chasing past performances — Once I got smart enough to switch to a discount broker, I committed another mistake. I chose mutual funds based on their past performance and Morningstar rating. I picked several loaded / high expense-ratio funds that lagged the general market in the subsequent years.
  4. Experimenting with my IRA — Back then I had tons of ideas. Unfortunately most of my money was in IRA, so I experimented using my retirement money — big mistake! First, money lost in an IRA cannot be replenished. I was allowed to deposit $2,000 per year and that was the limit. Second, I could not claim my losses as tax deductions. Since the IRA was tax-sheltered, the loss was simply a loss.
  5. Not paying attention to expense ratios — Not until recently did I realize how badly expense ratios can affect investment performance. I always thought “it’s only 1%, what’s the difference,” and went for the investment with better performance. I finally ran some numbers and I was shocked to learn that a difference of 1% can lower my investment performance by 25% over the course of 30 years. Instead of ending up with $1 million, for example, I might only have $750,000.
  6. Not paying attention to distributions — This is another number that I did not pay attention to back then. I held some funds in my IRA and some in my regular account. For a couple years, I thought high distribution was really cool because I was making more money. How silly was that? Now I realize that I am paying other people’s taxes when I get mutual fund distributions. Now with my regular account, I invest either in low distribution funds or in ETFs. (Distributions do not affect IRAs.)
  7. Not paying attention to asset allocation — Way back when, my investment was mainly in large-capitalization U.S. stocks and funds. I did not know about asset allocation as a risk management and performance enhancement tool. It wasn’t until 1999 — when I became eligible for a 401(k) — that I started giving asset allocation serious thought.
  8. Ignoring diversification — Again, with little experience and little money to invest, I was going after high-flying stocks (at least I thought they were) and did not pay any attention to diversification. Like asset allocation, it took me a long time to realize how diversification helps to reduce risk and enhance performance. The value of diversification became apparent to me at about the same time that asset allocation did.
  9. Selling winners and keeping losers — This was my all time weakness. I knew the concept of “buy low and sell high.” So with little experience, I ended up selling a lot of my winners like Staples (SPLS), Ameritrade (AMTD), and Microsoft (MSFT) to lock in the gain; but held on to my losers like Flemings (FLMIQ) and eToys.
  10. Cost averaging down — This was another “buy low and sell high” mistake. Not only did I hold on to my losers, I bought more shares in hope of lowering my cost basis and reducing my losses. I did this blindly without additional research to find out why these losing stocks went south.
  11. Investing without a goal — Not until recently did I define a real goal for my investment — among other things, one of my investment goals today is to build a $1 million investment portfolio by 2017. This is my main retirement portfolio. Other goals, which I am still defining, are investing to subsidize my kid’s college expenses and my parents’ retirement expenses. Without a clear goal, I was chasing short-term performance and was prone to act on market swings.
  12. Selling on corrections & buying at the top of the market — These are symptoms of not having a clear goal. Since I was chasing short-term performance with the objective of making more money. I occasionally gave in to my emotion and sold my investments during corrections to protect my gains. Occasionally, I did come out ahead, but most of the time I ended up rushing to reinvest my money as the market invariably rose after these corrections.

As you can see, I was not a very good investor, and it took me a long time and too much money to learn from my mistakes. I hope that by sharing these common pitfalls, you can avoid some of them on your journey. Good luck with your investing!

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18 thoughts on “12 Investing Mistakes I’ve Made, and How You Can Learn From Them”

  1. I love this post. I’m going to work on your second point in 2008. I think I need to learn more about investing, so I’m more comfortable with the whole process.

  2. Great post. The problem with investing mistakes, as many other experiences, is that people insist on learning the hard way… Part of human nature I guess.

  3. @Lynnae – Thank you. If you have any question about investing, just ask. I’ll be happy to help. The first step is to set a goal and understand what you are investing for, then we can go from there.

    @Dorian – Yeah, human nature. 🙂

  4. I’m currently working on post-grad debt, so anything I can find to help me save money is great.

    I think it would be helpful for schools to include courses on this sort of thing… we were never even offered anything like that.

  5. When I first got out of college, I socked a lot away in 401k, Roth and stocks without knowing much of what I was doing.

    I think took a 401k loan, which I think helped me because it I was able to rebalance my portfolio and contribute the interest (though I was bad in that I lowered my contribution to 0% during that time).

    As for the Roth, I blew $1,200 in that by getting Sci & Tech during the Dot Com bubble. I also did not know what I was doing getting stocks, and sold some for a loss when I went to buy our first house.

    I think I must have lost $4,000 in the whole experience.

    So, now I just have a 401k, some saving accounts, and one share of Intel that was a Christmas gift. But I’m looking to get back in as I get some more money to play with. I just have to figure out my strategy/goals and know better how everything works.

  6. hey Pinyo,

    Figured I’d post a blurb here, better late than never. This particular post has been good to both you and me.

    Harris tells me you’ve gotten a lot of traffic from it and I can tell you the ‘My two cents’ version of it has been my most visited (on topic) post for 2007.

    Do you think I should submit it to the ‘best post of 2007’?… figured I’d ask since it features some of your thoughts.


  7. @Cairan – that’s a great idea to submit it as best of 2007. This is definitely a great post. It was one of Get Rich Slowly 2007 top 12 post too.

  8. I think it is really open and honest of you to share these because personal finance is always a learning experience especially as most of us are not experts in the field. I totally agree with your comments about Investing Without Goals, goal setting is key and it’s a mistake i have learnt to my cost too. Thanks for sharing

  9. Great post. I have been through and invested through many recessions now and diversification has saved me many times. God bless having companies like Johnson and Johnson in my portfolio.

  10. This post is still valid given today’s market situation. Thank you! I have a couple of questions.

    1) Any suggestions on how to identify a “winner” stock with lots of legs for running higher, from a another stock actually peaking, given your advice with scenario #9? I did dollar cost average down recently (bad me) and recouped my costs in most assets with the recent run-up, especially with financial and Chinese plays. I have taken some money off the table, but am truly concerned about selling too low.

    2) Is there anything to be concerned about with 401k savings and Obama’s plans for taxes in the future?

    P.S. You think of refreshing this post as you may draw even more interest! Thanks again!

    • @201k – You’re welcome.

      1 – Over the past few years, I came to the conclusion that investing in individual stocks is not the best investment strategy. Instead, it’s better to invest in globally diversified portfolio of low cost equity and fixed income funds and let your asset allocation/rebalancing do the work. With this more passive strategy, identifying winners and losers become less of an issue. Instead, you are looking more at how does a particular fund or ETF fits into your overall asset allocation strategy.

      As far as dollar cost averaging down, this is not necessarily a bad thing to do since the entire global economy and equity value went down.

      2 – That’s always a concern, but you can only do what is best in the current situation; otherwise, you are speculating. However, if you are concerned about future tax rate and the rules governing 401k, you can manage the risk by splitting your investment — i.e., between Roth versus traditional.

      As for refreshing the post, I am in the process of going through my archive and giving selected articles a new life. Thank you.

  11. I used to make the same mistakes when I first started my investment journey. These are tough lessons indeed.

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