What are 9 things you should NOT do when you start investing?
Jun 8 2020
Big idea: by avoiding some not-so-obvious pitfalls, you can save yourself money and psychological angst during the“honeymoon” period of your investing journey.
Investing has become more accessible to the you’s and me’s than ever before. Practically anyone can invest with any amount of money and pay almost nothing in fees. Better yet, you can do it all on your phone. Without even asking your parents.
That’s a great thing! Well... it’s pretty great…. There are some notable risks that come with jumping in face first(my personal favorite way to jump), so it is important to be aware of the major pitfalls.
Before we start…
I’m guilty of doing everything outlined below because I didn’t know any better. I literally fell into these pits. Hopefully that means you won’t have to. So here we go: what NOT to do when you start investing.
01: convincing yourself that you’ll be able to outperform the market
Outperforming the market means that your investment choices will generate returns that are better than the stock market on a whole. We’re calling this out as pitfall #1 because it’s the most expensive version of“illusory superiority”(i.e. people thinking they’re above average). It’s like walking into a casino convinced you’re going to beat the house(which my friend Dan does regularly because sadly he’s addicted to gambling).
Outperforming the market over many years is something even institutional experts rarely accomplish. You’re special in your own way, but you don’t have special stock picking abilities. Harsh, but it’s true. If you can learn that lesson the not-hard way and take my word for it, you’re incredibly mature. If you insist on learning it the hard way, don’t say I didn’t warn you.
02: taking advice from people who claim they can show you how to beat the market
Financial“gurus” want money. Your money. There are plenty of hucksters out there that make it seem like stock picking is easy and they leverage FOMO marketing tactics to get you on the hook. By not going with their paid service, you are missing out. You’re missing out on being bamboozled.
Scumminess is a spectrum — on one end you’ve got the malicious scam artists, on the other, the accidental misinformationists(example below from an online investing tutor). Both are bad.
If you bought the S&P 500 index(SPY) at $330 per share, and then it went down to $280 when you had to sell… you would be losing money.
Rule of thumb: If it has a“doctor’s hate this one simple trick!” vibe, stay away. Lots of snake oil out there people.
03: jump straight into picking individual stocks
I’ll admit, stock picking is fun(so are casinos! that’s where they get you!). Investing in specific companies you like is totally fine — just recognize that without conducting appropriate due diligence, you’re essentially gambling. What due diligence? Simply put, you should be able to navigate a company’s financial statements with a degree of confidence that says,“I know what these numbers mean.” If you can’t do that, stock picking may not be for you.
Additionally, when you start picking your own stocks, you are signing yourself up to fight some psychological battles(with yourself). If you don’t have a strategy or the emotional wherewithal to get through big ups‘n downs, you’re going to get beat up(also by yourself) and you could easily end up worse off than when you started.
04: making frequent changes to your portfolio
There’s a reason we’re talking about“investing” and not“day trading.” Investing is about buying quality assets that you intend to hang onto for a long time. No one knows what the market will do day-to-day, so making frequent changes to your portfolio in response to the news or some“insider information” you got from your cousin Todd is a losing game. The market is gonna do what the market is gonna do(some have called me the“provocateur of Cow Hollow”)-- don’t screw your long term returns by thinking you have to do something when a whole lot of evidence suggests the best move is usually to do nothing.
05: trying to time the market
I heard about some 13-year-old kid trying to convince his mom to open up a brokerage account so that he could“buy the dip”. I hate 13-year-olds as much as the next person, but the truth is, there’s nothing wrong with sitting on some cash so that you have funds to deploy when the market dips. Lots of people do this. But“buying the dip” is not a standalone strategy. Companies do actually go out of business… and then their stock’s value is $0.
Thinking that you’ll be able to“time the market” can cost you. The main risk is being out of the market during the best days. Take a moment to ponder the famous platitude from Peter Lynch:“time in the market is better than timing the market.” He wasn’t just blowing smoke.
06: ignoring tax implications
As“easy” as investing has become, there are some less sexy parts(the armpits of investing, if you will. And if you think armpits are sexy… who am I to kink shame you?). Let’s take taxes for example. Taxes can be a massive drain on long term returns, fortunately, there are simple ways to minimize your tax bill. So before you start smashing your thumbs into your phone to open up a Robinhood account, carve out some time to understand the tax treatments of regular taxable brokerage accounts(Robinhood) vs. retirement accounts(401k, IRAs).
07: ignoring fees
You might have heard the term”mutual fund” once or twice. Well, these babies claimed to deliver great returns, but ultimately got a reputation for stripping investors’ long term earnings due to their complicated and often hidden fee structures. Mutual funds still exist, and they still carry quite a few fees(ah, the promise of a money manager delivering better than market returns… guess how many mutual funds outperform the S&P 500? Answer:not many). Luckily there are plenty of other low-cost investment options out there that will NOT zap potentially hundreds of thousands of dollars from your retirement fund.
08: listening to reactions & predictions from the mainstream media
The saying goes,“buy the rumor, sell the news.” The“news” that they are referring to, is literally… the news.(Also, let’s all just accept that there are too many sayings about the market and move on.)
The idea being: if it’s coming from CNBC, it’s old news and the market has already“priced it in”(if you notice a trend or an angle that can be perceived within 5 minutes of looking at a specific company or stock, everyone else has noticed too and it is reflected in the stock’s price).
Last thing on this point… even billionaires are limited to speculation on the effects that world events will have on the market.
source: @HipsterTrader… Business Insider stole his chart!
09(this one should go without saying): using Reddit for financial advice
This one should be pretty obvious. I love Reddit as much as the next person. It is an amazing online community with a ton to offer. But it is not a reliable place for shrewd financial advice.
Browsing r/investing, r/stocks and r/wallstreetbets will definitely provide some insight into what people are thinking and how they are thinking, but it’s a lot of people(subconsciously or not) looking to validate what they already believe to be true. Funny how we do that.
“If I’m not supposed to do any of those things, what am I supposed to do?”—You, probably
Investing should stop and make you think. It’s an amazing opportunity and it presents lifelong advantages for people who start young. But there’s“starting young” and then there’s“starting young, pointed in the right direction, and not having to backtrack.” One of them is significantly cooler than the other. We’re here to help with the cooler one.