Learning To Invest: The Education of A Long-Term Investor

The evolution and education of a long-term investor.

I often hear about horror stories regarding people who’ve made big mistakes trying to invest their hard earned money. These horror stories happen because of the lack of familiarity people have about the investment world. We may have been there before as well — a typical scenario is this: the uninitiated start off being uncomfortable or unfamiliar with the investment world, so they are distrustful about where to put their money, until a well-meaning friend or family member comes along to persuade them to invest in either a personal project, business or fund that eventually goes nowhere. Such an experience then sours the would-be investor from taking any further risks with their money. And an unhealthy relationship with money commences.

This brings to my mind how things were for me when I first started learning how to handle my finances. A lot of the education I’ve received not only came from mistakes I’ve made myself, but also from hearing about practices done by others, which yielded subpar results for them down the road. Interestingly, I’ve found that many of us perform these money moves repeatedly, living up to the saying that old habits die hard.

So what have I got here? A list of common financial habits that we often perform, whether or not its in our best interest to do so, especially when we’re still at the cusp of beginning our financial education.

Questionable Money Moves Made By New Investors

Keeping most money in cash.
I have a few friends who are deathly afraid of volatility and the stock market and think it’s synonymous to gambling. But they’re trading the risk of volatility with facing the risk of inflation since money in cash is just not going to keep up with rising prices in the long term.

Using a professional broker to provide financial advice.
There’s nothing inherently wrong about seeking professional advice and money management assistance. However I’ve also seen first-hand how a broker had ripped off my own parents at one point in their lives. From that lesson alone, I vowed never to trust anyone but myself with direct management of my finances. Instead, I house my funds in a few highly regarded online brokers. I’ve considered working only with well-awarded discount brokers such as TradeKing and ETrade.

Entering into business with friends and family.
Nothing inherently wrong about this either, except that there’s a way to approach such ventures. I often see deals and agreements sealed with handshakes and many times, it’s a cultural thing, but I’m just not the type who’ll take chances. No contract, no deal.

Giving one’s business to friends and family without due diligence.
When you’re close to people, they expect you to give them their loyalty automatically and indiscriminately. So what happens when they ask you to give them your business? In my own circle, we’ve got lots of agents and brokers running around wanting us to sign up with their financial service, whether it be based on real estate, insurance, investment, etc. What do you do then? It can be a dicey situation if you aren’t necessarily comfortable with the services they’re offering.

Asking around for tips on the next big investment.
One of the most popular questions I get is: where should I put my money? With people expecting a simple straight up answer. I cannot count the number of times someone’s asked me about where they can get a quick 25% return in a few months. It seems difficult to accept that a reasonable rate of return for a diversified portfolio with controlled risk is only around 9% – 12% a year. Somehow, this just doesn’t sound good enough for the impatient, so they opt to trade stocks on their own to beat this market average or enter into more “exciting” but risky ventures.

Following investment fads.
It’s human nature to want to capitalize on the “in thing” of the moment. Unfortunately, what’s “in” one day becomes “out” the next day. Just ask the subprime mortgage holders out there.

But as time goes on, such mistakes hopefully turn into valuable lessons learned, and become for us, a form of tuition. My own investing education evolved from a lot of trial and error and experimentation, especially since I started investing at a young age (age: 23), a time when I took to heart the common financial advice that you should go “all out” with your money when you’re young and capable of making up for any losses you incur. Here’s a look at how my investing habits have developed throughout the years.

The Evolution of My Investing Habits

Like many, I started out being much more adventurous…

• I tried shorting, options, and considered margin investing.
• I traded single stocks.
• I followed stock tips on message boards.
• I shifted allocations often.
• I checked my net worth and portfolio numbers daily (compulsions).

Today I’ve steered away from these actions. After 18 years of investing, new habits have arisen (here I shift from “I” to “We”, having settled down within the last decade):

• We review and carefully evaluate our portfolio 2 or 3 times a year though when there is market volatility, I do tend to watch the market more carefully.
• We shift allocations and rebalance our funds based on how much our allocated percentages are off mark in our portfolio (and not based on emotion).
• We buy mostly during dips or on weakness. There’s a time we do start to get excited and that’s when there’s some volatility in the markets. It is a good idea to equate volatility with opportunity — seeing the silver lining in storm clouds that swirl around.
• We limit our account transactions.
• We keep our individual stock allocation to 5% of our overall portfolio. Our individual stock allocation is very small and involve stocks of companies we work for.
• We have a large emergency fund.
• Our core portfolio is in index funds and ETFs. The only “sector” we invest in is the Nasdaq through QQQQs. We’re not big on sector investing since we noticed this did not make too much of a dent on our overall portfolio.
• We never trade.
• We reinvest all dividends and practice dollar cost averaging diligently.
• We keep a tax efficient portfolio and focus on keeping our fund costs and fees low. We only purchase no load funds.

The point here is that I look back at our investing track record and realize that the education of an investor follows its own life cycle. In my case, I started out brash, aggressive, and eager to do anything to make our money grow as fast as it could. As time flew by, I tempered my attitude towards investing and moved away from “active” investing and almost obsessive monitoring of our portfolio. Today, I’d consider ourselves “old fogeys” when it comes to investing — we prefer to be as simple and as passive about investing as we can possible be, yet ensuring the healthy growth of our net worth. In other words, my investment profile changed throughout the years. But I guess, that shouldn’t be all too surprising, don’t you think?

It’s true that today, we’d consider ourselves the most boring investors around. Though I believe we started out as much more exciting and “passionate” about investing when we first started, we found that as time goes on, just like an adolescent turns into an adult, we’ve pretty much settled down and mellowed out as investors. We figure, we’ve already sowed our wild oats when it comes to playing with our money and we’ve moved away from wilder investing methods to take on a more relaxed investment approach that allows us to just leave our investments alone to do their own thing. Is it age that does this? Experience? Is it just a matter of “novelty wearing off” or are we just being boring? 😉

How has your own attitude towards investing and financial management evolved throughout the years?

 
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