An Advisor’s Top 10 Investment Lessons Learned
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 accounts, 529 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.
How to Introduce and Position Yourself the Right Way
Introducing yourself – more to getting it right than you think!
What do you say when someone asks you “so what do you do?”
You might say, “I’m a financial advisor”. Or “I’m an investment advisor”. If you’re a top advisor, you might be compelled to say “I’m Vice President and Portfolio Manager”. Or even “I’m a CFA”.
Well put all of those away if you’re introducing yourself to a woman you might want as a client. None of the above will impress her – she might even “run for the door” thinking you’re going to try to “sell” her something.
Your goal is have her say “tell me more about that”.
So what do you say?
Here are 4 quick tips:
- Make it about your clients
- Make it about outcomes
- Make it interesting
- Make it fun
How about something like this: “I help people have their cake and eat it too”. Doesn’t that beg the question “what does that mean” or “how do you do that”.
Okay maybe that’s a bit over the edge but it’s important you make it about the people you help and not about what you do to help people get there.
I help <type of people you serve”> <achieve this>. Something like:
- I help retirees create a sustainable income.
- I help women understand money on their terms.
- I help young couples get a good start towards financial security.
Now you try it! Send us your best one.
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