7 Investing Tips I Learned the Hard Way
Newbie investors learn through personal experiences – both good and bad. Still, it's important to keep in mind general investing guidelines while in the learning phase, which honestly never really ends. Here are seven investing tips I learned the hard way. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Keep it in Vegas
Some newbies view investing as a game…as gambling. Don’t. Those with a gambling perspective should probably head to Vegas, where they’ll likely help build more of those beautiful marble monuments as they part with their hard-earned cash.
Ignore the Naysayers
Critics of today’s emerging commission-free, no-minimum brokerages (e.g., Robinhood and such) like to infer that new investors who invest on these platforms are typically uninformed, get-rich-quick types who have a penchant for gambling. But those critics may themselves be misinformed.
In fact, many newbies who try out commission-free platforms are the same as those who begin saving for retirement with small-dollar accounts…nothing wrong with that. And, according to Robinhood’s own data, most are clear-eyed about the fact that they are new to the investment game, and interestingly, are more racially diverse than those at traditional brokerages. Perhaps the naysayers' criticism of the current market democratization stems more from a threat to the existing order than for a concern of newbie investors’ financial well-being.
Data suggests that most of these new investors taking advantage of the marketplace’s low-cost entry points are simply making that first faltering step towards building a secure financial future that has eluded so many in our society for so long.
Focus on Diversification
By definition, newbies know little about equity markets. This lack of knowledge and experience is a good reason to focus first on highly-diversified mutual funds rather than on individual stocks. Make confident decisions based on good, old-fashioned research.
Tune out Static
Word-of-mouth info may sound appealing, but it must be taken with a big dose of salt. Again, do your own research and never, ever invest blindly based on hot tips.The market is full of noise…often untrue or inflated news about someone else’s beginner’s luck.
Practice Patience, Grasshopper
Newbies also must practice patience and be realistic about their investing expectations. I personally consider a yield of 8-12% highly desirable (from 1929 through 2019 the S&P 500 averaged an annualized 9.77%). Be an investor, not a trader. Attempts to time the market is ultimately a fool’s errand and frequent trades increase brokerage fees and other costs, including taxes on short-term vs long-term gains.
Guard Your Joy
As a beginner, don’t compare your results with those of more experienced investors. Their acquired knowledge is likely to trump your inexperience early on. Don’t let it needlessly dampen your spirits. As has been said, "Comparison is the thief of joy."
Avoid the Herd
And for goodness sake, don’t follow the thundering herd. Listen to your own instincts. Your gut can be quite honest. The herd inevitably rushes over the proverbial cliff during market corrections…often suffering three negatives:
Taking premature gains, resulting in unnecessary taxes.
Suffering losses on quality investments by losing faith due to fright.
Experiencing painful opportunity costs by re-entering a recovering market too late.
In conclusion, avoid emotional decision-making. Human nature programs all of us with certain biases that often affect investment decisions. Examples: Confirmation bias is the tendency to disregard negative information and dwell on data that supports prior beliefs or values; anchoring bias encourages investors to hang onto poor investments based on the original purchase price rather than “changed” underlying fundamentals; and buyer's remorse is the sense of regret often associated with making an expensive purchase.
Knowing about such biases can help you avoid them. Good luck, and through hard work make some of your own.