4 Big Mistakes That Hold Early Investors Back

William Miller |
Categories
Investments
Investment Philosophy
Financial Planning

1. They Don’t Have Enough Money to Invest

A common concern that young investors have is that they don’t have enough money to invest or enough to make a difference in their future. There are many apps and firms out now that will let you open accounts for $50 or less. While $50 does not seem to be a lot, if you contribute ongoing it can be.

The chart is assuming a 7% growth rate

 

The chart above shows how $50 per month can improve your finances. As you can see the earlier you begin investing the more time you will be giving to the account to enjoy the glory of compounding interest. Here is how the graph breaks down:

  • If you started investing at age 20 and go until 65 you would have contributed $27,050 and would have a portfolio value of $172,499.
  • If you started investing at age 30 and go until 65 you would have contributed $21,050 and would have a portfolio value of $83,473.
  • If you started investing at age 40 and go until 65 you would have contributed $15,050 and would have a portfolio value of $38,220.

There is not a big difference in the amount that you contribute but there is a big difference in portfolio value based on when you began contributing. To put it in perspective, if you were to wait until you were 40 to start investing, you would have to contribute $227.27/month to have the same account size as if you invested $50/month at 20.

2. Trying to Find The Next Big Thing

In a 2021 research paper, it was found that 60.3% of large-cap fund managers underperformed compared to the S&P 500. This was the 11th straight year where fund managers did not keep up with the index.

When it comes to investing boring = better.

Now it is possible that you could find the next Apple or Google, but how much money would you lose trying to find it? Would it end up being worth it?

Chart Description automatically generated with medium confidence

GameStop was trading for less than $5 for many years before the Reddit meme stock and then it got pushed up to around $483. Now if you had bought GameStop at $5 prior to its surge and then sold at its top point of $483 you would have made a huge return of close to 9,560%. However, most people got in late and lost money because the market corrected itself. This same thinking can go into buying penny stocks, crypto, and many other investments.

Having a low-cost index fund in this situation would not have even affected you. When it comes to investing boring is better.

3. They React Emotionally in Down Markets

I can't guarantee the market will go up and I can't guarantee the market will go down, but I can guarantee the market will go up and down.

One of the major things that I stress with clients is not overreacting to down markets and not getting overconfident in good markets.

How do we do this?

Developing an investment philosophy. Having an investment philosophy is so important when you talk about your investments because it goes deeper than returns, it talks about why you chose those investments. The following sample philosophy statement encapsulates a long-term strategy:

“To have a diversified portfolio built of low-cost index funds, that is rebalanced once per year.”

From this we can tell:

  • The investor does not want to be overly invested in a certain stock or sector (tech, communication, etc.)
  • They are thinking of long-term investing because they are not actively trading, they are just buying index funds.

I don’t believe a portfolio should change unless your investment philosophy does. No one likes to look at their investment account statements and see a negative return; however, the stock market and economy should not have an effect on your investment philosophy. Only your goals or financial situation should lead you to change your philosophy (getting married, having a kid, etc.).

For more about investment philosophies, check out my blog post here.

4. They Don’t Put Things in Perspective

The S&P 500 has been down 10%+ in 14 of the last 22 years at some point in the year but only has had a negative return 6 times in that timeframe. In fact, even in 2009, the end of one of the most recent recessions in U.S. history the S&P 500 was down -28% during the year and still finished up +23% for the year.

It is very easy to get caught up in the media and the day-to-day headlines about the economy, but you should do your best to block out the noise. If you had invested at the beginning of 2000, so that you received all the ups and downs associated with the chart above, your account would have a positive gain of 156% over those 22 years (an average return of 7.09% per year).

Looking at your accounts less often can reduce your stress and by focusing on the long term you learn to see downturns as opportunities to buy investments at “discounts”.  

Final Thoughts

  1. Your time in the market is more important than your timing the market or the amount of your contribution. You can always invest more later as you begin to have more cash flow, but it will be a lot harder for you to make up for the lost years of compounding growth.
  2. Your investment philosophy is a guide to how you should manage your investments. It should only change when your goals or finances change and should not be affected by anything in the economy.
  3. Focusing on the long-term with your investments and not making short-term decisions will help you reduce stress and increase your happiness.

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*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax, legal, or investment advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their accountant, financial planner, and counsel. Neither the information presented, nor any opinion expressed constitutes a representation by WM Wealth Planning as a specific recommendation to the purchase or sale of any securities/investment. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by WM Wealth Planning for educational purposes*­­­

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