As many things go in life, you take chances, you win hopefully more than you lose, and then you use those experiences to make better future decisions.
The same can be said of learning to invest. But the stakes are high, since you can run out of money far sooner than lessons are learned.
That said, here are a few lessons I've learned thus far. Perhaps I'd be a little bit richer today if I knew them when first starting to invest.
Fear will devastate your portfolio
I'd venture a guess that most people aren't familiar with the name Kevin Kelley. I bet he'd be a successful investor, too, but he's building a track record of his own on the football field (77 wins, 12 losses, and three state titles, to be exact) as head coach of Pulaski Academy's Football team in Little Rock, Ark.
See, Kelley championed an unorthodox approach that removes emotions from play-making decisions. Most perplexing to his opponents is that he rarely ever punts on fourth down when deep in his defensive zone.
What Kelly uncovered is that there's a high probability the other team will score regardless of receiving the punt or taking over possession on a failed fourth-down attempt. And the probability that Kelley's team will converting on fourth down is greater than 50% in many scenarios.
So why is it common to give up the ball and punt when all else suggests otherwise?
Blame it on the human brain.
Our brains are hard-wired to fear losing something of value, like possession of a football. The same factors are at play when losing money, say, during market crashes. It takes a conscious and stomach-turning effort to make the right decision, which, as we've seen for decades on end, is to hold onto stocks of great companies, since crashes tend to be just a bump in the road for the market's best stocks.
Left unchecked, though, making rash decisions out of fear can devastate even the most well-intentioned and well-planned investing strategy.
Figure out your return on time
Work smarter, not harder.
Sure, someone can profit trading stocks, but is that person being properly compensated for the time commitment of patiently staring at a computer waiting for obscure chart patterns to repeat themselves? Probably not.
Trading stocks is a thrill. There's no denying that.
But an overwhelming body of evidence shows that it's not a matter of timing the market but time in the market.
And mathematically, the most realistic outcome for most investors over time is at best average, and at worst, below average.
Add in a high tax bill from short-term trades and a mountain of commissions, and the outcome becomes even more bleak.
Things like this are overlooked as investors celebrate their big wins without asking themselves if they were worth the time, or if all of these wins (and losses) are beating the market in the first place.
I'd much prefer an average return for taking five minutes to park my money in an index fund rather than the same profits and a far greater time commitment.
Wall Street isn't your friend
it's no surprise that some new investors gravitate toward trading.
In fact, the whole Wall Street business model promotes trading in and out of stocks.
Watch where the money flows, and you get a good idea of Wall Street's motives. Sell-side analysts are the perfect example of this flawed model.
By always having an opinion -- through published reports on industry trends and stock recommendations -- and knocking on your door to tell you, the job of a sell-side analyst is to indirectly compel investors to trade stocks.
Sell-side analysts are commonly referred to as cost centers, whereas the bank's separate trading arm is the profit center that racks up commission when investors trade stocks.
Even more, sell-side analysts' intentions are not aligned with investors'. Analysts aren't necessarily compensated for making the right call.
A 2013 study of 363 sell-side analysts revealed the factor most important to their compensation was a deep industry knowledge, not the profitability of their stock recommendations and accuracy of their forecasts, which were both ranked lowest.
To be fair, sell-side analysts can be helpful when learning about new industries, but be wary of relying upon their advice to help you beat the market.
1 lesson that will never change
While I've learned a great deal in my still relatively junior decade-long investing journey, a new lesson or way of looking at the markets seems to bubble up almost daily.
One of my investing mantras will never change though. Investing can be extremely profitable and easy. You simply need a mind-set looking at the next decade, not just the next quarter when reviewing a company's quarterly earnings or the stock's 200-day moving average.
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