10 Investing Lessons I Wish I Learned Earlier

Investing is one of those disciplines you learn through trial and error. Whether you work through an advisor, trade heavily on your own, or play pin the tail on the donkey with your 401(k) fund menu, you have to make decisions, wait for results, and assess you how did. When the results are positive, you replicate your process. When the results are disappointing, you figure out why and implement the learnings going forward.

Trial and error is an effective way to learn, but there is a financial cost. To spare you from some of those costs, here are 10 investing lessons for which I've already paid the price.

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I started trading online in the late 1990s, when technology stocks were hot. At the time, I worked as a financial analyst -- so I figured I knew what I was doing.

At first, I did well. Then it all went sideways. The dot-com bubble burst and my modest portfolio tanked. It felt like the world was ending and my financial future was ruined. Deciding I had been reckless, I sold the securities in my brokerage account. For a good while after that, I kept my investing activities limited to the mutual funds in my 401(k).

Looking back, I could have spared myself financial losses and emotional turmoil by being less reactive to current market conditions. First, I made decisions assuming tech stocks would keep rising. Then, I made decisions assuming the entire stock market would always be weak. I would've done better with a more moderate approach across the board.

Market conditions ebb and flow. Resist any investment decisions that only make sense if the current climate lasts forever.

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Wealth building is far easier when you give yourself time to do it. To save $1 million, for example, you could sock away $1,325 a month for 25 years. Or, you could save and invest $420 a month for 40 years. Both scenarios assume an average annual growth of 7%, in line with the stock market's long-term performance after inflation.

In the 40-year plan, your contributions total about $200,000. The other $800,000 is earnings. In the 25-year plan, you must invest $395,000 to reach the $1 million balance. That's $195,000 more out of your pocket -- simply because the timeline is 15 years shorter.

Whenever I review scenarios like this, it motivates me to invest more right now. After all, the money I save and invest today has more potential to grow than the money I save and invest tomorrow.

Risk and return go together, and there's no getting around that. When you don't respect the correlation between risk and return, you might downplay risk or chase after the elusive "no-fail" investment. You may also overlook the importance of building stability into your portfolio. I know because I've made these mistakes.

Keep your head level by remembering this: The greater an investment's return potential, the higher the risk. It is a universal truth of investing. It's also the reason why cash savings accounts pay minimal interest and bonds return less than stocks. You won't lose your principal in a cash account. You only lose your principal on a bond if the issuer goes bankrupt or shuts down. But there are a variety of reasons you could lose money on stocks.

The flip side is that the stock market wouldn't have the high return potential without that risk of loss.

Stock picking is sexy -- but it's also time-consuming. The time commitment is fine if you love the research, monitoring, tinkering, calculating, and speculating. Personally, I don't. I like to make money investing, but I don't want my portfolio to be a second job.

Since it's not a good option to overlook details while holding a complex portfolio, I changed my investing approach. Now I focus on proven stocks -- S&P 500 companies and longtime dividend payers -- plus a few exchange-traded funds for diversity and growth potential. I don't buy anything I'm not willing to hold for the foreseeable future, and I don't often sell. My trading activity is mostly limited to buying more shares of companies and funds I already own.

Handpicking stocks is one way to build wealth, but it's not the only way. Often, a lower-maintenance approach can be less risky but just as productive.

ALSO READ: 5 Top Tech Stocks to Buy for the Long Haul

Accepted investing wisdom can lure you into selling your top-performing stocks -- in the name of taking profits or rebalancing. But walking away from your winners can leave a lot of money on the table. Why? Because great companies often continue to be great. If you buy quality stocks and hold them for the long haul, your earnings can grow to multiples of your original investment.

I've seen this concept work in action. A relative of mine amassed a multimillion-dollar personal balance sheet by holding one company's stock for decades. He never sold because he didn't want to pay taxes on the gain. I inherited a tiny piece of that position and a short-lived advisor recommended I sell it. I did and now regret it.

The takeaway? If you own winners, let them keep winning.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Market timing involves moving in and out of the market to maximize gains and minimize losses. It makes sense mathematically, but timing usually backfires in practice.

Here's how market timing usually goes south. It starts when share prices are falling dramatically. You decide to cut your losses and sell. The sale price on your shares will be less than is ideal and, possibly, less than your cost basis. You then leave your wealth in cash until you're confident the market has recovered. Once it's clear the bear market is over, you reinvest. At that point, your buy price will be higher than what you sold those shares for previously.

Your returns in that time frame will be below market. You'd have done better by staying invested through the bear market and riding the recovery back to positive territory.

Staying invested through all market cycles is the only surefire way to earn market-level returns. But what if you want to beat the market? Then you might think about going against the grain.

Going against the grain means buying when others are selling and selling when others are buying. I prefer the buy side of this strategy more than the sell side. When the market is struggling and share prices are down, I like to buy more shares. Padding my share count at lower prices is like taking advantage of a good sale. And it feels even better later, when share prices start rebounding.

There is risk to buying in a downturn, however. The recovery could happen quickly, or it could take years. Plan on leaving your cash invested for at least five years. If that's not possible, then hold off on buying more shares.

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A bear market can be a nonevent if you stay invested until share prices recover. Staying invested can require two things -- emotional fortitude plus ample cash on hand.

Cash acts as your first line of defense against financial emergencies. If you lose your job or wreck your car, you can dip into your cash emergency account. Without cash on hand, you may have to liquidate some of your portfolio. That liquidation reduces your invested balance, which is not ideal in any market climate. But in a bear market, liquidating also locks in your losses and lowers your long-term returns.

Extra cash on hand can also help you take advantage of opportunities, like buying more shares when the price is right.

Dividend-paying stocks don't produce eye-popping growth, but they prove their worth in bear markets. Longtime dividend payers usually keep up with their shareholder payouts even when the market's gone haywire. Procter & Gamble (NYSE: PG), 3M (NYSE: MMM), and Coca-Cola (NYSE: KO) are three examples. These companies have been paying dividends for over 50 years straight, through recessions, inflation, and bear markets.

When a bear market is stripping your stocks of their value temporarily, reliable dividend payments will be the highlight of your portfolio. Even better, a bear market is a great time to reinvest your dividend payments. When share prices are down, you can increase your share count more efficiently. Doing so should position you well for a strong recovery.

Mature companies with low debt and reliable cash flows are boring. These companies don't grow quickly, make a lot of headlines, or reinvent the way we live our daily lives. When they do innovate, it's often behind the scenes -- like how Walmart (NYSE: WMT) started using artificial intelligence to manage in-store and food storage temperatures.

Still, boring stocks have compelling advantages. They're predictable, financially stable, and generally resilient in downturns. They often have experienced, effective leadership teams. Many boring stocks pay dividends, too.

In short, when you want to add stability to your portfolio, boring is better. If you're risk averse, you might invest almost entirely in boring stocks. If you like a bit of risk, you could hold boring stocks alongside your speculative positions.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

These 10 investing lessons fall into three themes -- respect risk, stay invested, and remember that no market climate is permanent. If you want to take on risk for a shot at higher growth, go for it. Just have a backup plan in case things don't work out.

The most flexible backup plan is the one that involves cash, such as a hefty savings balance or a position in a reliable, dividend-paying stock. The extra cash can enable you to stay invested when emergencies happen, or to take advantage of market opportunities when they arise. Both strategies can help you reach your long-term wealth goals, sooner rather than later.

Catherine Brock owns shares of Coca-Cola and Procter & Gamble. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.