3 Crucial Investing Lessons I Learned The Hard Way
No one is perfect, right?
We've all heard this phrase many times -- and most of realize this is true when it comes to our work and home lives.
However, for some reason, many people don't transfer this reality to investing. But they should.
No one invests perfectly from the start; we were not born with the knowledge of what to do when investing. You will make mistakes when you are investing.
This is hard to handle, though, because it usually comes with a financial loss. And those can be particularly tough to take, especially in a less-than-robust economy.
Still, there is a positive side to imperfection when investing: We can learn from our mistakes and become better investors.
I, for one, have made many mistakes investing and have used them as learning tools. Here are three of most important lessons I've learned in investing... and the mistakes that forced me to learn them the hard way.
Lesson No. 1: Be Careful Who You Take Investing Advice From.
Do not ever take investing advice from those gossiping around the water cooler -- or any other area -- and then immediately purchase the stock. I took a "hot tip" back in the mid-'90s, and the stock immediately lost money and never recovered to the price where I had purchased it.
Just because someone says a stock is a "buy" does not mean it is a "buy" for you. That's especially true if you don't know any hard facts about the investing prowess of the person giving the tip. What if they have never gotten a return of more than 2%? Would you really want to follow that person's advice? With any investing tip, you still need to do your own research and make sure it fits your portfolio and goals.
Lesson No. 2: Don't Cash Out Too Soon.
Don't cash out of your investments unless you absolutely have to. Selling your investment too early eliminates one of the best investing tools you have available to you -- compounding. Allowing your investments the time to grow is vital to achieving your goals.
If I had not sold my first few investments early on, they would have been a great start toward retirement. Unfortunately, I never assigned my investments a purpose, so when I needed money in college, they were open game. Thus, the first thing you can do to stop yourself from using your investments for the wrong reason is to give every investment dollar a purpose.
While accounts such as IRAs and 529s have a set purpose, you still need to give your taxable investing a purpose. This purpose allows you to have a starting point to review the investment if you think you need to cash it out. For example, I have one taxable account that is allocated for retirement and one for supplemental college expenses for my child.
When something comes up that your emergency fund or cash flow can't cover, check to see whether the purpose of the account still stands and whether that purpose is more important than the current need. Then clarify whether the reason you want to access the money is a want or a need. Don't just rush into liquidating an investment; make sure you understand the reason behind the need, as well as the consequences that selling will have for your plans.
Another way to ensure you don't cash out early is to invest only those funds that you know you can leave alone. Make sure you have an emergency fund and room in your budget to leave your investments alone for at least five years.
Lesson No. 3: Avoid Excessive Fees At All Costs.
Finally, when hiring a planner, be sure that they are not using funds that have loads. We often hear about great fund companies through brokers not because they are the best investment out there, but because the broker can earn a nice little commission through loads.
I look at that fund's prospectus today, and I shake my head every time because the fees are so outrageous.
When interviewing a planner, ask to see a prospectus of one of the funds he or she would recommend for you -- or at least get the name and do some of your own research. If they are load funds, be very careful about investing with this planner. Fees are one of the best ways to destroy any return that might be had with your investments.
The Investing Answer: It's important to do your homework and research every stock and every move you make before you make it. But even if you do, you're not perfect; you'll make mistakes. Just be sure to learn from them.
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