Whenever you request guidance on how to invest to reach FIRE, you will often receive the comment you should invest in Emerging Markets e.g. through IWDA + EMIM. But should you?
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Last Updated on February 11, 2019 by Mr. FightToFIRE
I screwed up, more than once. Ever since I’m allowed to hold an investment or trading account I fell down and got back up. I started in 2008 with Forex and over time I moved to stocks. In this decade of trading both stocks and Forex, some of the errors I made happened more than ones and cost me a pretty penny. Today, I want to share with you my 4 biggest lapses of judgment based on this experience.
You will most likely think something along the lines of: “how could you make such stupid mistakes?” while reading. You are right. I should know better of course, but alas, hindsight is 20/20. At least I can share my personal mistakes so you don’t make them as well. Some, if not all of these, might not be new to you and are tackled by others, but when it comes to learning from one’s own mistakes, you can never repeat it enough.
So, without further ado, these are the mistakes I have made ever since I traded in both the stock and forex market.
Some of them caused more financial damage than others but overall, they all impacted me one way or another.
Being a worrywart
In other words, being too concerned about my investments. In general, I’m not too concerned with them (hence it’s “only” my number 4) but nonetheless, from time to time I doubt myself and create needless worry in my mind.
I’m highlighting this as a mistake because it makes you unconsciously assess investments riskier than they actually are while at the same time making you less tolerant of those perceived risks. By creating your risk profile (this can be with a bank but also online), you can gain a more objective view of your sense of risk and quantify this concern.
Seeking confirmation is a mistake I made a lot when I was still trading in the forex market and luckily have less of a problem with stocks. Whenever I had doubts about the entry of a currency pair (mainly EURUSD) I would seek out other traders on sites such as tradingview to find confirmation of the direction I traded. I caught myself more than once filtering through ideas of others searching for confirmation.
It’s an error that a lot of investors often make. You cling on to an opinion (of a share) regardless of the (negative) news.
Suppose you buy a Twitter share because you believe this little bird will take off big time. Once you have it in your portfolio, you risk seeing all information about Twitter in a positive light. This means you will magnify the financial impact of positive news and minimize or even ignore negative news. You will unconsciously look for information that confirms your positive opinion.
This behavioral abnormality called “confirmation bias” and threatens to cost you a lot if you ignore important negative news and absolutely stick to your Twitter share.
As the market price of your share drops (as it did for Twitter in January 2014) you might buy more shares based on your wrong positive attitude and increase the loss even more.
It is therefore quite important to look at all the information about a company without prejudice. Ask yourself these questions:
- What is the impact of this (positive or negative) information?
- Will the original reason why I bought the share stay?
These are important questions you should ask before you (re)purchase your favorite shares.
Losing track of the costs
Entry fees, brokerage fees, management fees, taxes, you name it. Anyone who invests their money knows that there are a lot of costs involved in investing which can become quite big if you don’t pay attention.
For Euroepeans at least, from this year on, the costs of your investments may no longer contain any secrets for you. Thanks to MiFID II – the European directive that lays down the rules for the sale of financial products and services – your bank is obliged to provide you with a global overview of all costs you paid last year.
Some of these charges are communicated transparently throughout the year, but there are also some “hidden” charges that are not immediately mentioned. These hidden are even present when you buy an ETF.
These invisible costs include:
- Operational costs of a fund
- Marketing and distribution costs
- Administrative and accounting costs.
- For ETFs:
- Rebalancing costs
- Securities lending
- Brokerage fees
- (local) Taxes.
The above costs are paid by the profits from the investments.
Besides these costs – yes there is more – (active) funds bought through your bank coming from an external asset manager also had hidden commissions that flow back to the bank in the form of “kickbacks”.
Fortunately, this has been tightened up with MiFID II and your bank is no longer allowed to receive these commissions.
However, there are still several loopholes that can be used. If your bank can prove that it serves to offer a better service (IT platform to keep track of your purchases) they may still charge for this, although this must be clearly stated in the statement of charges. Names given to this are:
- Distribution Fees
This is one pitfall I, unfortunately, fell into one too many times. In times of bitcoin madness, this is particularly relevant as I jumped in on it at the beginning of 2018 like many people. Investors who follow each other are of course not new, but that is precisely why it is important to underline this mistake. I continue to make this mistake.
Herd behavior occurs among both private and professional investors. Even fund managers regularly follow each other to the flavor of the day. It is much more comfortable to be all wrong than to be the only one right. Until the market proves you correct, you are under immense pressure to change your opinion and follow the masses, especially if the masses are ultimately right.
I already mentioned bitcoin and my other recent “herd purchase” (although to a lesser extent) was because of bitcoin as well: Nvidia.
While the company itself is solid, its price got heavily inflated because of the bitcoin craze. While I didn’t purchase the stock right away and thus not at its peak, I entered pretty late and I now own Nvidia at an average purchase value of about 200 USD.
And 4 more mistakes investors make
Better safe than sorry
Knowing which mistakes you shouldn’t make is one thing, but what should you do then? Well, here are 7 tips to stay rational:
- Diversify your portfolio so that you limit the weight of one individual stock. Do note when you diversify through funds, both active and passive, that you don’t lose track of your costs.
- Never, ever let yourself get dragged into hypes. They usually end up in tears for the vast majority.
- Know what you get yourselves into: what are the risks and which return can I reasonably expect?
- Don’t let yourself get influenced by your emotions and especially not those of others.
- Don’t try to time the market. Rather invest periodically and consistent over time. If you have 10K to invest, spread it out over 10 months rather than 1 big purchase. Of course, this does mean you will have multiple one-time costs, but these only take a small percentage of your final total costs.
- Don’t chase the recent market return. Look at the past and try to educate yourself on the performance of the company or fund you are interested in.
- Keep (running) costs in check. Don’t over-trade as this will inevitably result in more expenses that you can’t recover. Also, don’t pay more than you have to. This holds especially true for funds, even passive ones. Take IEMA & EIMI for example. The prior has a running cost of 0.68% while the later has one of 0.18%. EIMI is a solid 73.53% cheaper and does the same thing.
Do you have other pointers that you wish to share? Please leave a comment below and help others in their investment adventure.