This lesson is going to be a little different. The focus is going to be about 7 things that most people get wrong about investing. My hope is to expel these beliefs early, so you can continue on with the bootcamp without these lingering concerns and worries on your mind.
When learning something new it’s normal to have fears, concerns and to go in cautiously. Jumping into investing without understanding what you’re doing is exactly how people lose money, or worse are scammed out of their money by greedy people in the banking industry.
This list won’t be complete with every fear, concern or worry that’s out there. If you have a worry or concern, please please comment on this lesson with it! The more questions you can clear out of your head now, the more space there will be for new ideas and topics later!
1 – They try to invest in individual stocks
I hope I hammered this one already, but it deserves repeating. Investing in individual stocks may be the most publicized way to invest, but it’s also the way most people should avoid it.
I was initially exposed to individual stock picking way back in middle school. We did an exercise that’s extremely popular in schools – we picked some stocks and watched them over the next few months. I’ll be honest – picking stocks at that age was a lot like throwing darts at a target. I had absolutely no way of knowing which companies would go up or down. The stocks I picked were guesses, nothing else. It wasn’t based on data, research or any knowledge about the companies.
Rather than investing in individual stocks, your primary method to invest should be diversified, low-fee index funds.
2 – It takes a lot of time to invest
Getting started investing takes some time. Learning what to invest in, understanding where there’s room for improvement in the fees you pay, the taxes you pay and the assets you’re investing in takes some time.
It also takes time to grow confidence in yourself while investing. Getting to that point where you feel comfortable managing your own money may not happen overnight. It didn’t happen overnight for me.
When I started investing it was with a financial advisor that handled everything for me. I now know they selected a number of funds to invest in that they got a high commission on – also called a load fund. That commission was in addition to the fees I was paying them to manage my account.
When I decided I wanted to start investing on my own I didn’t immediately transfer every dollar to a new account. Instead, I started by fully understanding my 401(k) account that was with my job. Once I felt I knew how that fully worked, I opened a Roth IRA and invested a few thousand in that. Once I felt comfortable there, I began making plans for how I would invest the remainder of my funds that my advisor was managing.
Each one of these steps took months to take, but that was the time I needed to learn. Part of that was making a change in my account, then following how the markets reacted for a few weeks to make sure I didn’t somehow make a mistake and lose everything.
This is the part of investing that takes the longest – learning the basics.
Eventually, I transferred all the money away from my financial advisor and began managing it all on my own.
Now, when I say managing it, here’s what I mean:
- I set an amount to contribute to my 401k each month and selected which fund to invest in.
- I set an amount to contribute to my Roth IRA each month and selected which fund to invest in.
- I set an amount to contribute to my brokerage/after-tax account each month and selected which funds to invest in.
After setting up that automatic deposit, I didn’t need to lift a finger for months on end. When the new year came around I did change up exactly how much money was going to each fund and raised my 401k/roth contributions to max them out early in the year.
But beyond that, these investments were on autopilot. For months and years at a time, my only involvement with investing was making sure I had enough funds in my bank account for the automatic deposit to go through. That’s it.
I didn’t watch the news and react when the markets went up or down. I didn’t chase the latest market trend – whether that was a hot new company that was going public or sudden growth in an emerging industry. None of that was needed. By investing in the right things diversified index funds, those issues were already solved.
What’s needed next is time, additional investments and the occasional rebalancing to make sure you’re still diversified. We’ll talk more about rebalancing a portfolio in a later course after we’ve made our investments.
3 – You need to be really smart to invest
The people you see on the news or in movies investing always fit the same mold. They’re smart, future-thinking people who are able to spot a diamond in a field of corn. They have a sixth sense for seeking out the best investments and making them. It’s a skill they’ve developed over years of practice.
The thing is, that’s Hollywood investing, not normal people investing. Most people, including most financial advisors, are just normal people who are playing the odds.
If you think about the stock market as a casino, Hollywood investors are playing roulette, while smart investors just invest in the casino itself.
You do need to be really smart to invest in individual stocks. You need to know the history of the company, how good management can execute on their goals, the competitive landscape, past and upcoming regulations that may impact the company, lawsuits, patents, unique selling proposition and so much more.
The value of companies stock takes all of these into account as well and is priced based on the knowledge everyone else knows. If you believe you know more about a company than people whose job it is to analyze that company then that’s when you’d want to invest in it. For the most part, though, these analysts are going to know much more than you do.
Which is exactly why I don’t recommend investing in individual stocks. Rather than trying to pick the winner on the roulette wheel, you can buy a piece of every stock in the form of an index fund. When you do that, you don’t need to know what every company you’re investing in does. Just know that the fund will invest for you.
4 – You need to constantly buy and sell things
When you start investing, you’ll likely get to the point where the value of your account is up. Maybe you started with $10,000 and now the value is up to $10,250. You’ve made $250!
Since you only really make this money when you sell, it can be tempting to want to sell and capitalize on that gain then reinvest. That’s banking your winnings, right?
There’s a lot wrong with this.
For starters, if this were in a 401k or other tax-advantaged account (something we’ll look a lot more into later), what do you plan to do after you sell? Are you planning to just hold that money in cash? If that’s the case, you’ll be missing out on potential gains later. Since the market spends most of its time at or near an all-time high, trying to “time the market” and sell then rebuy it is a dangerous game. More often than now you’ll sell at the wrong time and then rebuy in at the wrong time as well – losing money twice.
If you sold $10,250 for a $250 gain in a taxable account, you’d have the same problems as a 401k – but you’d also have to pay taxes on that $250. We’ll dig deep into taxes in a later course, but they could range anywhere from $0 to $92.50 on $250. Taxes alone could wipe out most of your potential gains!
There are a lot of different strategies for investing in the stock market. Fidelity analyzed accounts from people between 2003 and 2013. They found that the best performing accounts were from investors who were DEAD! In second place were investors who had FORGOTTEN they had accounts at Fidelity.
I love this quote by John Bogle, the founder of Vanguard and the inventor of the index fund:
“Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.” ― John C. Bogle, The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns, 10th Anniversary Edition
You don’t need to constantly buy and sell funds to maximize your returns. In fact, doing so will almost surely cost you a great deal of money.
5 – They trust experts whose financial incentives don’t align with their own
This one is extremely important. This is how the banking industry makes the bulk of its money – by skimming it out of your account into their pockets.
When you invest with a financial advisor at your bank, it’s possible that the interests of that financial advisor are with the bank first, and you second. This puts them in an awkward spot, where their primary objective is to make money for the bank rather than to help you make money.
Some financial advisors are also fiduciaries. A fiduciary is a person or organization who is expected to manage assets for the benefit of the other person rather than for their own profit. They cannot personally benefit from the management of those assets unless expressly allowed.
If you are investing with a financial advisor today, ask them if they have a fiduciary duty to you. If they can’t say yes, that means that their interests are in direct conflict with your own.
Someone managing your money wrong can add up in countless ways. If they don’t need to manage them in your best interests, they can do anything! They can put your money in funds where they get a commission. They could buy and sell more often than is needed to get an extra commission, or just to make it seem like they’re doing something. They could even pick funds that charge a high fee to use that their employers benefit from.
Having a financial advisor manage your funds who is not a fiduciary should sound absolutely terrifying to you. It means they have full control over your money and don’t have a duty to you to do anything.
You may be wondering if I’m a fiduciary. The answer is no. Fiduciaries act on your behalf. Minafi and I offer no services where I act on your behalf. Minafi is purely educational content for you to act on your own. That could mean managing your own investments or choosing an advisor who is a fiduciary.
From a financial benefit side, there are no investments recommended here on Minafi receive any benefit from recommending. I don’t get a commission, an affiliate fee or any benefit from recommending any investments. I’m recommending them because I believe them to be the best investments and what I myself invest in.
Minafi makes it’s money entirely through people paying for the education content in the bootcamp and the occasional affiliate link to a product on Amazon or a financial related service like You Need a Budget for budgeting or Personal Capital for tracking your investments.
6 – They keep money in cash and don’t invest
This one may seem obvious, but 60% of people who have access to a 401k don’t invest in it! That’s the biggest place to start. Even at high-paying jobs I’ve had when I talked to some of the smartest people they were reluctant to put their money into the stock market. They saw it as a place where they might see their hard-earned cash go down in value.
If you’re not investing because the stock market itself isn’t a sure thing, that’s a very logical complaint! What is a sure thing though is that if you put your money into a savings account, then it’s actually losing about 2% a year due to inflation. So which do you want to do? Have a guaranteed loss of 2% a year, or a potential loss by investing in the stock market?
Historically, the US Stock market has risen an inflation-adjusted amount of about +7% a year over since about 1900. Since this is inflation-adjusted, it means if inflation was +2%, then the actual value went up 9%! Compared to -2% if you put your money in cash, that’s a 9% swing in the value of your money.
That +7% average includes The Great Depression (1929-1932), World War II (1937-1945), The Savings and Loan Crisis (1986-1985), The DotCom Bust (2000-2002), The Great Recession (2007-2009) and many other down years. Even with all those, the market went up overall!
In other words: if you’re scared to invest in the market because it goes down then you’re guaranteeing that your money will lose value due to inflation.
7 – They base investment decisions based on past performance
When I first started investing, I had no idea what I was doing. I went into my 401k portal and sorted the investments by their 1-year return. I put my money right into what was at the top – at the time in the mid-’00s that was an international fund.
When you don’t know how to evaluate funds, you’ll go by what you know, and past-performance is an obvious one. It performed great last year, so it’s as good as anything else for next year, right?
This isn’t the worst way to choose what you invest in, but it’s up there. The problem with choosing the best performing fund in the past is obvious: past performance is no guarantee of future performance.
Take a look at this chart. It represents the market sector returns for each year. One thing that stands out is how often categories spike from the top to the bottom!
In 2006 you might have noticed real estate going crazy and put all your money in that, only to lose big in 2007. If you switched to emerging markets next, you would have seen that lose big the following year. The biggest winners one year are often the biggest loser the next year.
Rather than trying to pick the winners, take a look at that “You” allocation. That’s a diversified portfolio that includes US stocks, International stocks, and bonds. You’ll notice it’s never the biggest winner in any given year, but it’s also never the biggest loser. Diversification is an extremely powerful way to invest that I personally follow. This is the type of investing we’re going to focus on in this course.
Knowing how to diversify an account gives you the knowledge to confidently invest on your own and not base decisions only on past performance.