This post was written by Austin Pryor and Matt Bell was originally published on the Sound Mind Investing website and reposted here with the permission of Sound Mind Investing.
Mistakes. All investors have made a few. And many later say the lessons they learned “the hard way” have been among the most beneficial parts of their investor education. Perhaps just as helpful — and certainly far less painful — are lessons learned from other people’s mistakes. So for this article, we’ve asked SMI readers to share some of their hard-earned investing lessons.
It’s an uncomfortable fact of life: We tend to learn more from our mistakes than our successes. Owning up to the ways we mess up may be emotionally difficult, but it’s an excellent path toward improvement. That’s undoubtedly true in investing. Recently we asked SMI members to tell us about their most significant investing mistakes. We’re grateful for all who told us their stories. Here are a few of the lessons they learned.
Waiting too long to begin investing
- “My biggest mistake was not starting early enough. I had too little to invest to make any difference, or so I thought. I should have had the discipline to set aside small percentages of my income earlier in life when I wasn’t making much. If I had started earlier, it would have helped me get the ball rolling on investments and given me valuable experience.”
- “My biggest mistake by far: waiting so long to begin saving/investing for retirement. I was raising six kids on a preacher’s income and rationalized that I couldn’t afford to put anything away. Now I realize I could have at least done a little, and that little would have become a lot. The worst part of it is that I knew better at the time — I was just undisciplined.”
- “My first mistake was waiting 18 months to start contributing to a 401(k), which will cost me more than $300k by the time I retire. I remained uneducated about investing strategies for way too long. Hard to know the cost, but that probably cut the portfolio in half over a lifetime.”
- “My biggest mistake was not listening to Larry Burkett when he first recommended SMI back in the early 1990s. If I had started with SMI then, I would probably have twice the retirement savings I have today.”
This mistake — not beginning to invest at an earlier age — was one of the most frequently mentioned investment-related regrets. Good intentions often are overcome by dozens of questions that arise when people try to get going. Where do I open my account? What do I invest in? How do I do this exactly? Busy schedules push the answers to the back burner.
If this describes you, it’s time to stop allowing implementation paralysis to thwart your good intentions. Starting an investing program isn’t difficult. By making a few fundamental decisions and taking a few easy steps, you can begin a successful investing program — even if your available cash and knowledge are limited. (For a primer, see the February 2020 cover article, The Core Building Blocks of Successful Investing.)
Not getting an education on investing basics earlier
- “My biggest mistakes have centered around buying the individual stocks of companies that I did not completely understand. But as I look back at that, I am thankful in a way for that expensive lesson. It made me realize how ignorant I was about investing and money management! Over the next several years, I began to seek financial understanding. Now I have a solid foundation, and I’m able to make educated decisions with confidence.”
- “My biggest mistake was not having help when I first invested in the market. I was investing by reading magazines only. I could have had much better returns if I had better knowledge back in those days.”
- “If I had begun to follow SMI back in the late 1990s when I first heard of it, I would have potentially avoided the pitfalls of putting too many eggs in one basket, never rebalancing, and investing without a plan.”
Many people make the first mistake of not beginning to invest earlier in life because they find investing confusing and intimidating. Unfortunately, investment “experts” create the impression that investing is difficult, and that it might be best if it were not entrusted to amateurs (like you).
SMI is written with your needs in mind, to equip you to have the confidence to take charge of your financial life. If you’re relatively new to investing and want help in getting your investing education started, order The Sound Mind Investing Handbook. Just as you can flip a switch and enjoy the benefits of electricity without understanding the technical aspects of how it all works, so it is with investing. In the Handbook, we cover just enough information to enable you to establish a practical (and relatively easy-to-manage) long-term investment strategy.
Investing apart from a personalized long-term plan
- “My biggest mistake has been investing by my emotions and not by a plan. SMI has helped me get off the emotional roller coaster and trust God for the future.”
- “One major mistake was selling my taxable mutual funds at a loss to pay off a house at a time when the market had crashed, only to see it rebound a short time later. I believe this falls under not having an investment strategy.”
- “My biggest mistake was not investing my lump sum after retiring according to the plan I came up with for my season of life. I decided on a 50-50 split to start with, but I didn’t follow through. This was just past the bottom of the market and even though stocks were going up, I thought that it was a temporary rally. So I invested only 25% in stocks and waited for it to go down again. I watched the market go up and up and up. I finally completed my buying, but at a much higher cost than I would have if I stuck to my original plan. I would now be twice as well off had I just followed my plan.”
- “When I started in my career and began to have money to invest, I had no strategy and randomly followed tips from co-workers. I bought stock in a small company that subsequently went bust and I lost everything. Not having a strategy led to poor outcomes. I’ve been following SMI for years now and have a clearly defined strategy. SMI’s encouragement has kept me on track (with great results) and allowed me to be a much better steward of God’s blessings.”
No matter how good your particular investing choices may be, if they’re made outside the framework of a larger plan that sets boundaries and helps you manage risk, you’re inviting trouble. We continually emphasize the importance of this. (This SMI article suggests the “best practices” to follow at each phase of life as you construct a financial plan of your own.)
Not following a selling discipline
- “Years ago, when I first started Upgrading, one of my funds went down. I knew it was going to go back up even though it was no longer recommended, so I held on rather than sell at a loss. It never went up. Lesson learned.”
- “Prior to going to school for financial services, I purchased one share of Apple stock while it was rising in 2012 only to get cold feet and sell a month and a half later for a $20 loss. It didn’t cost me too much money to learn that you should never invest or sell out of fear.”
Which do you think is more difficult: knowing when to buy an investment or knowing when to sell it? In theory, they’re equally difficult. But as a practical matter, you’re likely to have more difficulty with the selling side of the equation. When buying, you typically have a stimulus to help you along — an adviser/broker, financial magazine, or (blush) an investing newsletter with a strong track record. When you combine that stimulus with the natural optimism of most investors (we doubt if you invest expecting the outcome to be a disaster), it’s not too difficult to take the leap to make a purchase, especially when investing smaller amounts.
But on the sell side, the same forces that got you into the investment now conspire to keep you in. Most advisers/brokers are not predisposed to issue sell advice, and as the readers quoted above testify, their own intuition or optimism inclined them to hold on. We’ve often written that one of the keys to success in investing is having a specific, objective selling discipline. That means you know exactly what must happen to trigger a decision to sell. (Of course, then you must have the self-control to act when that trigger occurs.) The selling discipline built into our Fund Upgrading, Dynamic Asset Allocation, and Sector Rotation strategies is one of the chief reasons for their long-term success.
Overinvesting in a single stock
- “My biggest mistake was taking what little money I had saved to start investing and putting it into one stock based on my father’s recommendation. The company went bankrupt and I lost all my initial savings. I learned the hard way to diversify and do my own research.”
- “Around 1998, our son went to work for a new online health food store. It looked like a good, growing business. Like many start-ups, they went public. I could have placed an order to buy on the first day of issue, but I did not, which was good. About eight months later, I bought 100 shares at a slightly lower price. The price held there for a while, and then did a slow slide. Eventually, I received two checks for about a tenth of my original investment.”
- “When I was younger, I bought individual stocks and as I matured in age I dumped them all (smartest thing I ever did). If I had it to do over, I wouldn’t waste time investing in individual stocks. I still get the itch to buy certain stocks, but I just don’t scratch that itch!”
- “I’ve learned that ‘all in/all out’ strategies are not usually wise. Less-extreme approaches, with gradual, incremental changes are more likely to succeed, even if we give up some potential higher gains in the process. It’s a little like driving in the snow: Sudden hard stops or turns get you in trouble; but slow and easy changes keep you safe and make the ride a lot smoother.”
We believe that, ultimately, it’s impossible to self-destruct financially if you follow God’s time-tested principles for stewardship. One of those principles is that to protect against the uncertainties of the future, your investments should be diversified: “[D]ivide your investments among many places, for you do not know what risks might lie ahead.” (Ecclesiastes 11:2 NLT). Since you don’t (and can’t) know the future, you can never know with certainty which investments will turn out most profitably. That’s the rationale for diversifying — spreading out your portfolio into various areas so you won’t be overinvested in any hard-hit areas.
At SMI we do this in two ways: diversifying across several risk categories and using mutual funds. We prefer mutual funds, including exchange-traded funds (ETFs), because they allow investors to easily assemble a diversified portfolio of stocks and bonds at a reasonable cost. SMI has used such funds — with great success — as the basis of our strategies for 30 years now. (For a primer on the advantages of mutual funds, see chapter 5 of The SMI Handbook. For more on ETFs, see What’s Not to Like? As Commissions Drop to Zero, Already Low-Cost ETFs Become Even More Attractive.)
Overinvesting in an employer’s stock
- “Before I knew any better, I owned a lot of stock in the company I work for. It took a dive and has never recovered. To put it in perspective for my wife, I told her, ‘You know that minivan we’ve been thinking of buying? That’s how much we just lost’ (about $35K).”
- “My biggest mistake was getting too concentrated in my employer’s stock in my retirement account. One day on the way to work, I heard the news that my employer had been charged with fraud to the tune of $11 billion. The stock went to $1. Making matters worse, I knew they couldn’t shut us down due to the impact that would have on the general economy and the national communications network. I actually bought more and advised family to also. The company went bankrupt and the stock became worthless. Thankfully, my family still loves me!”
- “Our biggest mistake was saving for a down payment on a house by investing in the stock of the company my wife worked for. We were in our mid-20s, no kids, and were living off of my salary. She was working for a telecom company and was able to buy their stock at a 15% discount. So we did, putting most of her salary into it, and in a couple of years we had $85,000 ‘saved’ to put toward a house. About a year later, the stock was worth only $15,000! It still hurts to think about that.”
This is a common mistake, and one we’ve written about time and again (for example, see Is Holding Company Stock in Your 401(k) Risky or Advantageous?). Pitfalls arise from being dependent on a single company for one’s income, insurance, and retirement investments. If something happens to the company, not only could workers lose their jobs and health benefits, they could also watch the value of their retirement assets plummet as the price of their company’s stock falls.
How much company stock is too much? There is no hard-and-fast rule because individual situations can vary widely. However, a general guideline is to limit your investment in any single stock (your company or otherwise) to 5%-10% of your total investable assets. Given that you already have so many of your financial eggs in your employer’s basket, the lower end of that range is probably appropriate when dealing with your company’s stock.
Delegating stewardship authority to someone else
- “I invested $16,000 with a financial planner who asked what type of investor I was. I told him I was aggressive. He then ‘diversified’ into four individual stocks and turned the $16,000 into $4,000. When I had enough, I asked him to sell the stocks. He charged me $500 for his service. That was when I decided to start investing on my own. SMI has played a huge role in this process.”
- “My biggest mistakes came from being unwilling to learn to manage my own finances and fear of the unknown. We used a financial planner and trusted him without doing any homework. He offered us an investment that seemed too good to be true. We finally asked another adviser and he said the suggested investment was inappropriate for our small amount of money. We finally pulled our money out (with losses) and paid thousands of dollars in fees. I regret that I had no courage to follow Sound Mind Investing before all this happened.”
When we present ourselves to God as “living sacrifices,” our material possessions are included. When we make “The Great Exchange” (2 Corinthians 5:21), part of the transaction involves giving up ownership claims and recognizing management responsibilities. As stewards, we are accountable for our management choices.
You have been given a stewardship responsibility that you can’t delegate away. Yes, you can delegate authority to someone else to make certain investment decisions, but you cannot delegate your responsibility for the results that come from those decisions. Once you “own” this fact, you will take your management obligations even more seriously.
Making “hands-on” investments where experience is lacking
- “In 2008, we sold our fully paid for home and built a new one. Our home had doubled in value in the nine years we had owned it. Instead of using the money to build our new home, we took out a loan — against everything we had learned — and used the money to make down payments on three rentals. We went from being debt-free to buying four homes with four loans at the peak of the market. Seven years later, after paying down on the loans, if we were to sell, we’d still lose all the large down payments. If we had stayed debt-free, we would have all that money we used to pay extra on the loans to invest. One year of bad decisions undid decades of work.”
- “Our biggest mistake was thinking we knew how to flip houses. We bought a townhouse as a rental property. When the real estate market tanked, we were underwater. After subscribing to SMI, we devised a plan to get out from under that burden and get our finances in order.”
One of the qualities of an appropriate investment is that the risks are well understood. The above-quoted inexperienced real estate investors thought they knew what they were getting into, but sadly they were mistaken. The right portfolio move is one that is prudent under the circumstances. You should consider worst-case scenarios, such as how much of your investing capital you can afford to lose and still have a realistic chance of meeting your financial goals.
The investments that offer higher potential returns also carry correspondingly greater risks of loss — which brings us to the next common mistake.
Investing in exotic areas where promised returns are unusually high relative to conventional alternatives
- “My biggest mistake was getting into a venture capital program without understanding the risk involved. It was at a time when the market was just going up and up. Then the financial crisis started, and everything got affected. You need to understand your risk tolerance/temperament and your investment time frame.”
- “My biggest mistake was not listening to the Lord speaking to me about my first investing venture. A group of Christian friends had been investing in a foreign currency exchange system for several years with ‘too good to be true’ returns. I prayed and watched it for six months as their returns continued to roll in, and ignored the bad feelings the Lord was laying on my heart. Within two months of my investing, it was exposed as a Ponzi scheme (with one friend still in prison for his part in it). I decided to learn as much as I could about investing, which is when I found SMI. I continue to pray, invest, and learn daily.”
- “I followed the advice of a financial planner to invest in a ‘safe’ investment pool (invested in foreign bonds) that was ‘guaranteed’ to return 7-9% annually. My wife had reservations (nothing she could put her finger on), and yet the investment performed as ‘guaranteed’ for several years. Then the investment pool manager (a local college finance professor) was exposed as running several pyramid schemes. I learned to invest only in things I could understand, and also to listen to my wife’s (unexplainable) radar. Lesson learned, but it would have been nice not to have paid such a painful price.”
Your investing plan must be realistic about the level of return you can reasonably expect.The reason any investment offers a potentially higher rate of return is that it has to in order to reward investors for accepting a higher level of risk. Our goal is to get you to your destination safely while incurring the least risk possible. It’s not likely that your situation requires exotic or complicated strategies.
Trying to time the market
- “As I was following SMI during the 2008 bear market, I became uncomfortable with losses in our portfolio. I began following a writer who was a ‘naysayer.’ Instead of continuing to follow SMI’s Upgrading with our entire portfolio, I missed about two-thirds of the market’s return. Lesson: Don’t deviate from the plan.”
- “My biggest mistake has been not heeding SMI’s constant advice that the market always comes back after a correction. I sold funds I should have kept, and did not share in the first part of the recovery. In spite of myself and mostly thanks to SMI, I have an 11% average gain since 1990.”
- “My biggest mistake has been buying high when the market was going strong and selling low when I was afraid the market would lose too much. I like SMI’s Fund Upgrading because it takes the emotion out of the whole process.”
- “My biggest mistakes (three times) have been selling my accounts at the bottom while at the same time keeping my wife’s account (much smaller) in the market with SMI. As the markets came roaring back, I watched my account stagnate as my wife’s account grew quite nicely.”
Despite endless research showing the difficulty of market timing, many investors succumb to the temptation to try. We’ve written about this many times, and will continue to do our best to convince readers of the wisdom of staying the course with one’s long-term plan regardless of current events.
Here are a few other mistakes readers told us about that we can’t fully include for lack of space:
- Not involving your spouse in the investing process;
- Following the market’s impact on your portfolio daily; and
- Leaving 401(k) accounts with previous employers instead of managing those investments yourself.
Long-time readers know we’ve written on all the topics mentioned in this article, with counsel that could have prevented the common mistakes shared by these readers. So, for your own financial health, keep reading, keep learning, and keep applying God’s protective “sound mind” principles.
Our thanks to everyone who shared their biggest investing mistakes. Their willingness to tell us about lessons learned the hard way is a great example of what we aspire to be: a true community of people committed to spurring each other on in love and good deeds (Hebrews 10:24) — and wise investing!
This post was written by Austin Pryor and Matt Bell was originally published on the Sound Mind Investing website and reposted here with the permission of Sound Mind Investing.
Austin Pryor has 40 years of experience advising investors and is the founder of the Sound Mind Investing newsletter and website. He’s the author of The Sound Mind Investing Handbook which enjoys the endorsements of respected Christian teachers with more than 100,000 copies sold. Austin lives in Louisville, Kentucky, with Susie, his wife of 54 years.
Matt Bell is Sound Mind Investing’s Managing Editor. He is the author of four personal finance books published by NavPress and two video-based small group resources. Matt speaks at churches and universities throughout the country and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.