When I first dipped my toes into investing, I decided to invest in individual stocks. I don’t think I necessarily thought I could outperform index funds or other mutual funds. I just wasn’t fully aware they were even there. Sure, I had heard the phrase ‘mutual fund’ mentioned, but it sounded like it was for people with a lot more money than me. I just figured that individual stocks were the way to go.
Where I Started
Since I was a cheapskate even back then, I did do my research on brokers, and settled on TradeKing for its straight forward pricing and low commissions. At the time, if commission free brokers existed, I didn’t know about them. Either way, picking TradeKing was not my biggest mistake. For what I was doing, they were great. My biggest mistake was investing in individual stocks in the first place. I had no business being there.
Admittedly, I got off to a fairly good start. Although I didn’t do a whole lot of research into my investments (which was dumb), I invested in 4 relatively safe ‘blue chip’ stocks. However, even at TradeKing’s low $5 commission, I had already shelled out $20 in commissions. Had I held on to these 4 stocks, they likely would have tracked the S&P 500 and similar indices fairly closely, Over time, those one time commissions also would have been inconsequential even compared to the low ongoing index fund commissions.
Where I Went Wrong
I’m sure you already know where this is going. I didn’t hold on to those 4 stocks for very long. I got in the bad habit of checking my stocks daily and quickly grew bored with them. And I read too many ‘hot stock tips’. Within a few months, was swapping out my stocks for other stocks. Each swap cost me another $10 ($5 for selling the old, $5 for buying the new). In less than a year, I had racked up $100 in commissions, which on my $3000 dollar portfolio would be equal to a 3% mutual fund expense ratio, which is excessively high. And as I got bored with those blue chip stocks, I started venturing into more risky, less established companies.
Now, I made some fantastic trades. I about doubled my Sketchers investment, and pulled in some 30 and 40% returns elsewhere. But those were just lucky guesses, and of course were balanced out by investments that I’d rather not talk about. I even ventured into the hedge fund world- and lost half of that investment. The long and short was that I was treating my stock portfolio like a slot machine, hoping for big rewards, and ignoring all my losses.
Where I Ended Up
Somewhere along the line, I realized how dumb my investing style was. I think that bad hedge fund bet started the wake up call. I also realized that I was investing at an hour (or several hours) a day into ‘researching’ and watching stocks. By this time I realized how accessible mutual funds were. So, after almost 2 years of trying to ride the market, I realized I had no business picking stocks, and bailed. I consider myself incredibly fortunate that I eked out a 3% return on my overall portfolio instead of losing money. But my stock picking run was also between October 2009 and March 2011 when the Dow and S&P returned almost 20%. Between my bad picking and all the trading commissions I had racked up, I sacrificed at 18% worth of returns in a single year- which in my case was over $500. Not to mention all the time I wasted on the project.
Where I Am Now
So I haven’t completely given up on the stock market. The stock market gives the average investor access to the profits of everything from startups to Fortune 500 companies and I still believe its one of the best places to park your money. But the thousands businesses available via the stock market perform wildly different from each other. Some gain, some lose, while some just sit still. Trying to figure out which stock is going to do what is at best a full-time job, and at worst a crap-shoot. Research even suggests that most full time fund managers are lousy stock pickers and can’t outperform the stock market average. Which makes me feel a lot better about myself.
So I needed a solution that would let me stay in the stock market while avoiding stock picking altogether (including stock picking by the ‘pros’). It couldn’t cost a lot in fees or commissions, and couldn’t require a huge time investment on my part. Clearly, passive managed index funds were my answer. With maintenance fees around .2%, and no trading commissions, passive index funds take a broad sampling of the stock market, giving you exposure to the winners and losers in the stock market. Sure, in some years the economy has a rough time moving forward and you’ll have more losers than winners. But over the long haul the stock market returns a pretty healthy average 7-10% return.
No Regrets
So I could beat myself up over the $500 that I could have made. But there’d be no point. What I learned through this exercise was worth far more than $500. I gave me the courage to invest. Before I tried this, I didn’t think I had any business being in the stock market. Now I realize how accessible it is. I also know that regardless of how rocky my ride in index funds might be, it’ll never be as rocky as my stock picking ride. I have absolute confidence that my index funds will eventually rebound after a market downturn– something I couldn’t have said about my personal portfolio.
It’s only because I dipped my toes in the stock market that I’m investing at all. After my experience in stock picking, I realized that I should be investing for retirement more than anything. I was still young and kid-less, so I was able to get a good running start in a Roth-IRA– something I doubt I’ll ever regret. In 20 years, the $500 gain that I missed out on may end up being the best money I’ve ever lost.
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This post was inspired by ‘My Biggest Money Mistake’ on ShePicksUpPennies.com
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I look at it as an expensive life lesson rather than a mistake. Plus on top of that, investing in something is often times better than nothing at all. Congrats on your financial journey towards passive index funds!!!
Thanks for the positive perspective! And yup, sometimes the school of life is pretty costly. I guess all we can do is choose to learn from our mistakes!