This is the classic post that is more useful to the writer than the reader. Pondering and analysing investors mistakes but, more importantly, your mistakes is one of the most effective way of learning.
Reading about someone else mistakes is…better than not knowing at all but I am not convinced it has a high % of success in helping you avoiding the same mistakes; you have to experience it first by yourself (at least the majority of us does). Then, is going to help you not to repeat the same mistake again.
Invest in stuff that you understand
Keep it simple. More complex does not equal to a better strategy, at least if you are not the person selling it. I am not the greatest fan of Bitcoin but if you want to do crypto, understand it first. In and out. Every strategy has periods of drawdown, knowing what you are doing helps you endure the pain or allows you to acknowledge that your initial hypothesis was wrong and let you move on. Also, there is no shame in admitting to yourself that you do not understand something, even if all your friends and internet are all over that new profitable idea.
Read, read, read
Do not forget to invest in your financial education. Investing done right is both an art and a science. For that reason, you must be wary of half-truths and oversimplification that don’t respect the inherent complication of the process. Do your homework first. Our decisions are affected by our values, moods, crowd psychology, previous experience, greed, and fear. Yet, we persist in the illusion that we (always) invest logically. You must work on yourself to improve your decision-making process while also developing your knowledge of investment strategy.
Keep costs at minimum
Fees are the best predictor of future fund performance, according to a study by Morningstar. Imagine you are a company that sells a fund rating system, the stars, and admit that costs are a better predictor at your job than what you are selling. Minimise trading costs: avoid trading with your commercial bank, even worst with the account you have at non pure banking institutions like the Post or a supermarket (still do not know why supermarkets are in the current account business in UK). Unfortunately, not everyone in Europe is as lucky as the Americans that can trade for free.
Do not invest without a long term plan
Define a Strategic Asset Allocation and stick to it. Don’t make the mistake of spending more time planning your vacation than planning your financial future. Be methodical and write down your disciplined investment plan. Diversify but not Diworsefy: diversification only adds value when the new asset added has a different risk profile; diworsefy is a false diversification, for example when you add a US large cap equity ETF to a high dividend stocks mutual fund: not exactly the same, but way closer than the combo of a commodity ETF and a p2p lending investment in Europe.
Avoid home country bias
Do not trade single stocks…
…but if you do, keep a diary where you write the reason why you bought and why you sold. Re-read your diary. Also, multiple research studies agree that at least 90% of the variance in a diversified portfolio’s returns are attributable to asset allocation. Don’t try to pick the next hot stock or top performing fund when the experts who dedicate 100% of their working time to this stuff are consistent failures at the task. Stock picking definitely does not qualify as passive investing.
Match investment style with personal goals
There’s no single right answer to investment strategy that will result in financial success for everyone, but there’s one right answer that will be true for you. Find the path that will honour your skills, resources, goals, values, and risk tolerances so that you experience personal success and fulfilment from achieving financial success. For some, the best way to financial independence is to invest 100% in building their personal business, a very concentrated risk. I never tried day-trading because it definitely do not match what I am interested in but I have friends who are successful at it.
Beware of excessive conservatism or risk taking
The essence of the investment game is balancing risk with reward, and the better you get at risk management, the more reward you can pursue. Try to be aggressive when the reward merits the risk, and conserve capital when risk is excessive (do not be greedy!): being this contrarian is extremely difficult, that is why as a starting point is imperative to have a balanced Strategic Asset Allocation and the discipline to follow it. If you are young and saving for the long term (i.e. pension), you can go for 100% stocks, just remember to avoid home country bias; in fact, being too conservative does not allow you to compound enough to reach your future financial goals.
Do not try to time the market
I often read bloggers that say: the stock market is expensive now, so I invest in p2p, but if it corrects, I will invest back in stocks. First, you are leaving on the table all gains that stocks made from when you went underweight to today (If you considered the S&P500 too expensive at the beginning of 2019, you missed a +25% gain: quite expensive mistake so far). Then, you will need the guts to jump back in the market when everyone is rushing for the door. What happens in reality: you miss a huge part of the leg up, then jump in too early and have to suffer the pain of the way down. Unless your are the next George Soros, in that case please call me.
Be Humble
Don’t mistake brains with a bull market just because you happen to be in the right place at the right time and made some good money through sheer luck. This is valid for stocks, p2p, crypto, real estate. Evaluate yourself during a complete market cycle: I read bloggers that started to invest 10 years ago and think that they know it all. Unfortunately that is also when the most recent US stock bull market started, how will they and their strategy react during a real market downturn?
What did and did not work for you? Any lesson you would like to share?
What I am reading now
