An Advisor’s Top 10 Investment Lessons Learned

An Advisor’s Top 10 Investment Lessons Learned

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Have you made investing decisions you regret?

I know I have. I recently turned 40 and thought it was a good time to reflect on my own investing mistakes and lessons learned from my 17-plus years of experience.

1. Don’t follow the herd


I started investing in June 1999, right near the top of the technology bubble, and made the same mistakes as many others by buying hot tech stocks. Everyone was making money; why not just invest in a handful of technology stocks and watch them go up 20% to 30% per year?

Obviously, this did not happen for me — or many others — as the Nasdaq 100 dropped almost 80% from peak to trough.

Lesson learned: Following the crowd is not a recipe for investment success. It’s OK to be different.

2. The best investment may be the one you don’t make


My decision to not invest in a Myrtle Beach, South Carolina, condo in the mid-2000s was a smart decision. Many “experts” were saying real estate never loses money, but I couldn’t get the numbers to work.

Twelve years later, those same condos sell for 25% less than their long-ago sale price, not even mentioning the ongoing property taxes and maintenance costs. Many investors struggle with the fear of missing out, but resist the temptation.

Lesson learned: Sometimes saying no is the best decision.

3. Invest in your own human capital


In 2003, I decided to go back to school and get my MBA from the Kellogg School of Management. This investment took time and money, but the result was additional knowledge, a lifelong network and a higher-paying job with greater earnings potential. A lot of people try to find the perfect investment, but sometimes the best investment is themselves.

Lesson learned: Making yourself more marketable and attractive to employers through personal development will only help you in the long term through increased earnings and job security.

4. Avoid large holdings of your company stock


Before the financial crisis, I worked for a financial services firm in New York that compensated employees via stock options and employer stock in their 401(k). Financial stocks in the mid-2000s were a lot like technology stocks in the late 1990s; they only went up. Then the financial crisis occurred, and the stock price declined over 90%. In addition, there were massive layoffs at the firm. Fortunately, I survived the layoffs, but many employees lost their jobs and a significant part of their nest eggs.

Lesson learned: Limit your employer’s stock to no more than 5% to 10% of your portfolio.

5. Don’t try to time the market


It’s really hard to time the stock market. Every day you’ll hear or read about one person saying to buy stocks and another urging you to sell stocks. I’ve found the easiest way to invest is to make scheduled monthly contributions to your various accounts — 401(k), IRA accounts529 plans or investment accounts.

This is called dollar cost averaging. The benefit is that if stocks drop, you’ll buy more shares because they’re less expensive, and if stocks rise you’ll buy fewer because they’re pricier.

Lesson learned: Take the emotion out of investing by setting up an automated investing schedule.

6. Avoid the noise


Early in my career, I’d watch popular cable business news programs that would provide “stock tips.” I learned pretty quickly that their goal was to make money selling advertisements, not to boost my long-term portfolio wealth. I’ve stopped watching these kinds of shows and focus on things I can control, such as my savings, life insurance, taxes, estate planning, and so on.

Lesson learned: Don’t get caught up in the short-term noise; focus on the things you can control.

7. Equities are for growth, and bonds help you sleep at night


I started my investing career in 1999, and during the first 10 years I witnessed two of the worst stock market crashes in history with a peak-to-trough decline of over 50% each time. Take your portfolio and divide it by two, and how does that make you feel?

How did high-quality bonds do during this time? They increased in price or stayed flat, which allowed me to rebalance my portfolio. They also helped me sleep better at night.

Lesson learned: A diversified mix of stocks and bonds gives you a better chance of sticking with your investment plan than a 100% stock portfolio. Stocks may provide a greater long-term return, but if you sell at the bottom it doesn’t matter.

8. Implement a disciplined investment strategy and stick with it


There are many investment strategies, and there are times when one strategy will work better than others, but over the long term the returns shouldn’t be materially different. The problem is most people jump to what has done well lately when they should be doing the opposite.

Lesson learned: Implement and follow an investment strategy and stick with it in good times and bad. If you don’t have a strategy, implement one or have a financial planner help you.

9. Control your behavior


Controlling costs is the current fad, which is a good thing for investors, but investors controlling themselves is much more important. Right now that’s easy to say, because the U.S. stock market has done very well the past seven years, but how you feel and act when the market drops 50% will have a big impact on your long-term investing results. Buying high and selling low is not a recipe for investing success.

Lesson learned: If you can avoid pouring too much money into equities when the market is riding high (March 2009) or too little when it’s sinking low (October 2007), you’ll be better off. Studies by Vanguard, Morningstar and Dalbar show the average investor trails the market by 1.5% to 3% per year due to poor decisions caused by wanting to jump on the latest fad.

10. Time is your best friend


I’ve invested for over 17 years and remain amazed by the power of compound interest. I’ve invested through Y2K, 9/11, the ’01-’03 recession, SARS, a real estate bubble, the great financial crisis, Greece’s potential exit from the eurozone, the debt ceiling debate, ebola and four presidents. The global equity markets have marched on.

For example, a portfolio of $500,000 17 years ago with a 5% annualized return would have grown to over $1.1 million assuming no contributions or withdrawals.

Lesson learned: Implement a disciplined investment strategy, be patient, focus on what you can control (savings, taxes, and so on) and avoid a big mistake. If you can’t do this, hire a fee-only financial planner to help you stay on track.

Chad Smith
Advisor
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Chad has spent the last fifteen years helping people discover how they can spend more time on things they enjoy.  He is a Certified Financial Planner (CFP®) an ... Click for full bio

Why Lasting Change Is Hard

Why Lasting Change Is Hard

Before we had any children, my wife and I lived in the heart of Dallas. One day, on our way back to our house, we were driving down Skillman Avenue when we were caught in a sudden torrential downpour.

The rain was coming down incredibly hard, which wouldn’t have been a problem if the storm drains were equipped to handle that much water. Instead, the road itself filled with water faster than we could have anticipated. Quickly, the water rose up the side of our car. Trying not to panic, we realized that we could not continue and would need to turn around and get to higher ground.

Water rising up the side of your car door is the kind of roadblock you might not expect to encounter, but when you do, it’s formidable. We couldn’t drive through it or even around it. We had to deal with it quickly or face serious consequences.

When we’re trying to implement change in our own lives, it’s important to identify and plan for common roadblocks to lasting change.

The first and, in my opinion, most important roadblock to lasting change is not addressing the real issue.

Let’s say you wake up in the middle of the night with a sore throat. You’re annoyed by feeling sick but your throat really hurts, so you get up and spray a little Chloraseptic in your mouth and drift off to sleep. When you wake up the next day, you still have a sore throat, so you pop in a cough drop and go about your day.

The change you’re making – using a numbing agent – might work if you’ve only got a cold, but if it’s strep throat, you’re not addressing the real problem. Only an antibiotic will cure what ails you, even if Chloraseptic will keep the pain at bay for a while.

Just like how more information is needed to diagnose your sore throat than one feeling, problems you encounter in your life or business require diagnostics, too. Figuring out the real problem – not just your most apparent needs – requires some introspection and a little bit of time.

Here are eight questions to ask when you need to discover the root cause, courtesy of MindTools.com:
 

  1. What do you see happening?
  2. What are the specific symptoms?
  3. What proof do you have that the problem exists?
  4. How long has the problem existed?
  5. What is the impact of the problem?
  6. What sequence of events leads to the problem?
  7. What conditions allow the problem to occur?
  8. What other problems surround the occurrence of the central problem?
     

Once you have your answers to these key questions, you can’t stop there. Your vantage point is skewed from your own perspective. You’re going to want to ask someone else to evaluate the problem at hand with the same questions and then compare your answers.

If you and all of the partners at your firm have similar answers, you’ll know you’re on the right track. If you wind up with wildly different ideas, I suggest seeking the advice of someone outside your organization. Fresh eyes can make all the difference in understanding a problem.

I often talk about being ‘too close’ to understand. You’ve probably heard the illustration about a group of people standing by an elephant with blindfolds on, trying to describe what they’re experiencing. Depending on what part of the elephant you’re next to, you’re going to have different observations.

But someone outside of that elephant’s cage can clearly identify the elephant.

The first key to making a lasting change is to make sure you’ve addressed the real problem and are looking for authentic change.

Next time, we’ll address the second major roadblock to creating last change.

Jud Mackrill
Digital Marketing
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Jud Mackrill serves as the Cofounder of Mineral. At Mineral, his focus is helping investment advisory businesses focus on growing digitally through full-scale design, brand de ... Click for full bio