I began seriously investing on my own back in the early 1990s. It can be difficult to remember what I was thinking as I bought this or sold that, or, just as important, what I was thinking when I didn't buy this or sell that. (Still, I have remembered enough to cobble together some lessons -- check out my mistakes.)
The other day, though, I stumbled upon a fellow investor's very fresh recollection of lessons learned in his investing life. That's because he's only been at it for a single year. Permit me to share some of the mistakes of Fool Community member someicg and to add some thoughts of my own. He began:
Today marks the one-year anniversary of my delving into the stock market. While I haven't done as terribly as some horror stories I've heard, I have not done wonderfully, either. I am up 0.8%. Yes, there is a decimal point in front of the number. To mark the occasion, I will attempt to help out other new investors. That's right, I'm coming clean and will admit to the mistakes I have made in my first year. But rather than just admitting to my mistakes, I will attempt to also relay what I "should have done." A word of caution, though: I am still a newbie and all advice should be taken with that in mind.
Mistake No. 1: I forgot about commissions
He explained: "That's right, I forgot about commissions. This will be a recurring theme throughout most of the remainder of my problems. Including commissions, I made a 0.8% profit. If you exclude commissions paid, I made 8.2% profit. (Notice the change in the placement of the decimal point.) Yes, commissions killed me." To avoid this problem, he recommended putting more money into each trade, so that the portion of the trade value represented by the commission is smaller. He added, "Know your investment strategy before you start putting in real money."
I concur -- strongly. I've written before that it's best to try to keep commissions low, ideally no more than 2% of each trade. So if you're investing $500, look to pay no more than $10 for the trade. If you're investing $2,000, cap your commission cost at $40. (We can help you find brokerages that charge as little as $4 per trade -- learn more in our Broker Center.)
Mistake No. 2: I didn't have an investment strategy
OK, technically, I suppose I did have an investment strategy -- I sought to first diversify and second to find the best companies that I could. That doesn't sound too bad on paper, but I really had no idea what I was doing. ... In the past year, I have dramatically changed my mind as to what is a "good company." As I figured out what were actually good companies (thanks in large part to The Motley Fool) I came to realize that some of my companies were actually bad, and I parted company with them. This, of course, cost money in commission fees. (See mistake No. 1.)
"Consider a variety of strategies before investing. Perhaps set up a mock portfolio for each strategy just to see how each acts. The Motley Fool has advocates for a variety of strategies and you can pick the brains of people on the discussion boards for ideas. Each [Fool] newsletter also has a different investing strategy, so there is another option. Take advantage of their 30-day free trials. (For the record, I do not work for The Motley Fool nor do I expect to receive any compensation for this plug. It just seems like a good idea.)" [I must interject here that, not surprisingly, I agree. Why not try one or more newsletters out for free? They're sporting impressive performances.]
Mistake No. 3: I forgot to consider personal values
"As I learned more about the companies I already owned, I was aghast to find out what some of them were doing. In essence, I owned (small) parts of companies that were doing things I was strongly opposed to. I sold them. I paid commissions."
You can learn more about socially responsible investing, if it interests you, in this Paul Elliott article and in this rebuttal of sorts by Lawrence Meyers. Many companies do offensive things, of course, but a little digging can turn up lots of firms you can feel good about. Consider, for example, cement giant Cemex
Mistake No. 4: I didn't pay adequate attention to the larger market
"I made a couple stupid decisions that I wouldn't have made if I had been paying attention to news indirectly affecting the company. To be slightly more specific without naming names, I owned an auto-parts maker that looked solid on paper. I bought shares two weeks before Ford
His reflections were excellent:
Although I thought I was [diversifying] well, I wasn't. I had five stocks that could somehow be traced to the auto industry. Thankfully, only one tanked on me. When figuring out how to diversify, don't simply look at a specific industry, but at how the various companies relate to each other. I owned an auto-parts manufacturer, a bus/RV manufacturer, a dealership, and an insurance company that had a high percentage of auto policies. Those are not diversified, even if they consist of two manufacturers, one service, and one financial. Now, as a caveat, I don't think it's smart for newbies to [own] six to eight stocks and claim to be diversified. We really don't know what we're doing yet. One stock tanks and there goes 12% of the portfolio. ... Pay attention to broader economic trends. This could be as simple as reading the business section of the local newspaper. As you see stories, think to yourself, "Self, what impact might this have on the companies I own or am thinking about owning?" This could save you a lot of money.
I'll just add here that things are often not as simple as you make them out to be. Lowe's
Don't forget context!
Here's another mistake investors often make: failing to consider context. Many investors seem to just be investing for investing's sake. They're trying to make money, of course, but they haven't really spelled out for themselves just how much they're aiming to make, and why. For most of us, a comfortable and financially secure retirement is probably a major life goal. Yet too few of us have taken the time to figure out how much we need to save and how we might invest to get to that point.
You might be investing aggressively, trying desperately to make a lot of money before retiring, when a little legwork might reveal that you're actually in better shape than you thought, and you needn't take on as much risk as you're taking on. Or maybe you're investing 5% of your income when you really need to invest at least 10% of it each year.
Let us help you look at your big picture. Consider taking advantage of a 30-day free trial to our Motley Fool Rule Your Retirement newsletter. It arrives in subscribers' mailboxes (not via email) each month, is readable in a single sitting, and contains a broad range of personal finance advice and inspiring testimonies.
Read the rest of someicg's mistakes and thoughts and the responses from his fellow Fool community members, which featured additional useful advice. And check out these articles, too, if you'd like:
- 9 Retirement Killers
- 7 Social Security Myths
- Stocks for the Really Long Term
- Do You Want to Work Forever?
- Get Rich by Beating the Odds
Selena Maranjian's favorite discussion boards include Book Club , The Eclectic Library , and Card & Board Games . She owns shares of Wal-Mart. For more about Selena, view her bio and her profile . You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . Dell and Gap are Motley Fool Stock Advisor recommendations. The Motley Fool isFools writing for Fools.