How to Avoid My 3 Novice Investment Mistakes

I started learning about my money during the summer of 2008 and I made some rookie investing mistakes during the early stages. Luckily, these mistakes didn’t cost me thousands of dollars like some money mistakes, but they’re mistakes worth learning from so that you can avoid them in your money life.

During that summer and into the fall , I started reading all kinds of books about money and I realized that as a 21 year-old without any consumer debt, I should be investing my money for the future.

I’m not a big planner, so I rushed the process. I wasn’t aware of the available options – mutual funds, index funds, ETFs – and I thought buying individual stocks was the way to go.

Well, after a year it turns out I was dead wrong with my initial investing theory.

So how did my journey bring me to this conclusion?

I remember reading Jim Cramer’s, Confessions of a Street Addict (affiliate) and being swept up in the world of hedge funds where managers daily bet millions on stocks to go up and down. It was a fascinating book, but I got caught up in the idea that individual stocks were the way to go and that’s what I decided on for my maiden investing voyage.

I decided to get into the game and test the investing waters with the discount brokerage Zecco. I’m notoriously conservative with my money and decided to put $2,500 into the market across 5 stocks – Wal-Mart, GE, JP Morgan, Constellation Energy, and Bank of America.

Here is what my initial purchases looked like:

Mistake #1: No research

This is a personal finance blog and admitting my mistakes for the greater good is part of the gig. I bought those 5 stocks based on just 3 factors:

1) what an issue of Money Magazine said were going to be “hot stocks” in 2009

2) companies I’d heard of before

3) size of the dividend – I had heard bigger was better, but didn’t know much more than that

Otherwise, I did absolutely no research into what the companies even did other than the obvious associations.

This was a dumb and risky move. I had no idea where I was putting my money and taking the word of the media as my sole investment advice.

Since then I’ve heard a great bit of investing advice that any beginning investor should live by: if you can’t easily explain to a friend what you’re investing in, you’re making the wrong decision.

Mistake #2: No reason for buying stocks

As I learned more about personal finance, I realized that buying individual stocks is the wrong decision for 95% of people. There’s too much speculation within stocks and the average person can’t accurately judge which way a stock is going to go.

Money managers in New York City are paid big bucks to figure this stuff out and even they fail to beat the average market return sometimes.

If I had the chance to do it over again, I would’ve learned about index funds early on. These funds spread your money across a ton of different stocks in a market with hopes of getting the average return.

Index funds are especially important for novice investors because it’s the simplest way to invest.

When you’re first educating yourself about money, it’s easy to fall victim to paralysis by analysis. With too many money decisions and stocks to choose, it’s easier to do nothing with your money. But nothing can quickly turn into 10 years and all of a sudden you’ve lost valuable time for your money to grow.

Index funds are the safest bet for beginning investors, and people who want to invest passively. These are the same people who don’t want to follow CNBC and those who don’t care about quarterly earnings.

Remember: if you can’t explain your investing strategy in simple language to a friend, you’re just kidding yourself.

Mistake #3: Not investing enough

I initially thought of my stock purchases as a test. I wanted to see how my nerves held up throughout the market fluctuations and I wanted to test myself on a small scale before I really started investing my money.

In theory, sounds like a good move. I was right to test the waters because making a big mistake as a 21 year-old could’ve easily scared me away from investing for 10-15 years.

However, I lost valuable investing time and potential return because I spread my money too thin across different stocks.

I bought in December of 2008 – 2 months after the stock market crashed in October. I should’ve reaped a huge return on my investment since I was buying stocks that were on sale during a tough time for America.

Here’s another look at my initial allocation:

As you can see, I didn’t have enough money in the individual stocks to reap the benefits from gains and dividends. Investing with less than $1,000 in an individual stock isn’t worth the time because you won’t see any major returns. I think my grandpa told me that once. I probably should’ve listened to that bit of wisdom.

Anyway, like I said, I started investing after the collapse of 2008, yet, because I didn’t invest enough, and because I speculated on individual stocks I knew nothing about, I didn’t come out that great in the end.

On the reverse side, if I would’ve put that initial $2,500 in Vanguard’s Total Stock Market Index fund (represents over 3,000 stocks) on the same day I bought the Zecco stocks, it would’ve returned 30% today and I would’ve returned around $750.

Instead, in January I sold 2 stocks for gains, but otherwise my returns are lacking:

Overall, I had some good ideas, but I rushed my decisions and had poor execution.

What to Take Away From My Money Mistakes

- Don’t ever rush a money decision. Timing the market is a losing game and if you’re a novice who is just starting off like I was, there’s no upside to hurrying. Learn the basics and make an educated first move.

- Take your time and learn about your options. Talk to friends and family, read blogs and books, and gauge what works best for your situation and nerves. Never take the advice of one person or source because every one will tell you something different when it comes to the longevity of your money.

- Don’t try to make the perfect decision. This is one thing I did right. I didn’t take 5 years to make a decision with my money. If you wait too long, you’ll lose interest and move on. Before you know it, you’ll be 33 and have 2 kids. Investing is always easier when you’re young.

- Most importantly, don’t be afraid to make mistakes. I don’t regret my decisions. I learned a ton and I lost around $300-400 in potential return. In the big picture, that’s nothing and the knowledge I learned from purchasing stock, experiencing the ups and downs, and realizing my mistakes is much more valuable than $400.

What money lessons do you wish you would’ve learned when you were younger?

Photo by: Katrina Tuliao

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