Investing Mistakes We Make

The Difference: How Anyone Can Prosper in Even The Toughest Times lists investing mistakes many people make as follows:

• Waiting to begin [investing].
• Not diversifying.
• Raiding a retirement account.
• Trading too much.
• Buying the next hot thing.
• Ignoring Uncle Sam (taxes).

My thoughts on these:

1. Waiting to begin investing is so devastating to your overall return because time is the biggest factor in determining the success of your investments. In short, the sooner you start investing, the better. The longer you wait, the worse off you are. It's that simple. (Yes, I know that there are exceptions, but I'm talking about most situations, not the exceptions to the rule.)

2. You can buy a few stocks very carefully like Warren Buffett does, assuming you have access to the research, information, capital, etc. that he does. Or, you could simply diversify by doing what he recommends the vast majority of investors do. Your choice.

3. This one kills me. Check out the following:

Business consultant Hewitt Associates looked at the behavior of 170,000 401(k) participants who left jobs last year. The review shows that 46 percent of those changing or losing their jobs took the cash out of their accounts. "Millions of Americans who rely on defined contribution plans will find themselves unable to achieve a financially secure retirement," she said.

When you cash out your retirement you're again losing out on the one thing that most determines the performance of your investments -- time (see #1.) (Related: Told ya.)

4. I know people that buy and sell almost weekly. Not only do they seem to never make any (or much) on the trades, but they are racking up TONS of costs in commissions -- even using discount brokers. I know exactly what they are thinking (that they can beat the market, they have a great "tip", etc.) because I used to do the exact same thing. Then I learned better (more on that in a minute.)

5. "Psssst. I have this hot stock tip for you." Ever hear that? Did it ever work out that way? Ok, maybe some did. But did most of the hot investing tips you've ever received pan out to be great buys? I thought not.

6. Taxes are simply another cost (like fees, trading costs, etc.) that can weigh down the overall performance of your investments.

So what's the answer? Index funds, of course. :-) They allow you to invest in small amounts (so you can get started early on in life), are instantly diversified, eliminate trading too much and buying the next hot thing, and minimize costs such as taxes. If you can simply control yourself and not cash out your 401k when you switch jobs, you'll cover all the issues noted above if you invest using index funds.

BTW, I'm still on the same investing path I've been on for awhile and so far it's working out quite nicely.

Comments

[Beastlike]

#3 scares me, because I'm sure in 30 years when many of these people are retiring, our country (currently on the path to socialism) will penalize us (that plan for our future) to pay their retirement.....

[Bheem @ Many Money Matters]

Very true.
Most of the activities you mentioned are emotion driven. One should first put together an investment( asset allocation in broad sense)plan and stick to that discipline.

Biggest strength of an investor( not a trader!) is discipline. That is the key to success.

-Bheem

[BillV]

Time may be the single most important. I'd wager that regular readers of this post have all read the old story of two people who invest: "A" starts at 21. Invest X for 5 years and never another dime. "B" starts at 30 and keeps investing X for 30 years. Who ends up with more? "A" because of the time value of money.

BTW, if any one recalls the exact figures/ages please correct my post. I may not have the ages and length correct.

[Concojones]

BillV,

Great story. It's mentioned here:
http://www.ir.bbn.com/~craig/things-i-wish.html
(Great page btw, I bet FMF would agree!)

FMF,

I would recommend index funds too for most people. Personally, I am really determined and I see this as a hobby, so I go with your number 2: "buy a few stocks like Buffet does". What I have found the greatest challenges so far (in that order):
1. buying the next hot thing
2. trading too often

My solution for number 2 is putting a realistic future value on the company and deciding in advance when to sell. The knowledge that your company is worth $x gives you the peace of mind to stick it out thru the hard times.

I haven't found a rock solid solution yet for number 1. One thing that will get you quite far already is giving extra attention to unpopular sectors (look at historical sector weigthings in the S&P 500).