Lessons Learned

Dennis Friedman

I HAVE MADE SOME glaring investment mistakes over the years. For instance, in my 20s, I was too conservative. I opened an individual retirement account and regularly invested the maximum annual contribution in a mortgage-backed bond fund. I still think about how much further ahead I would have been, if I had invested more of the money in stocks.

In my 30s, I received a $5,000 performance award from my employer. I wanted to invest the money, but wasn’t sure how. A family member told me about a utility called Tucson Electric Power. A few years later, in early 1991, the company was forced into bankruptcy and I lost almost all my money. I learned three important lessons: Never take investment advice from family members or friends, owning individual stocks can be risky, and make sure your investment portfolio is diversified.

In my 40s, I regularly listened to a radio show devoted to investing. The show’s host gave on-air investment advice, and also had a newsletter I subscribed to. I learned a lot from him. For example, I heard for the first time about index funds and the importance of keeping investment costs low. But there was one problem: He was a market timer.

One day, I sat in my living room, listening to people call into the show and thank him for his latest market-timing call. I sat there, with a feeling of envy, wishing I were one of them. The next year, I received an investment newsletter alert in the mail about another market-timing prediction. This time, he gave a major buy signal for the Nasdaq and suggested buying an exchange-traded index fund now known as PowerShares QQQ. I wasn’t going to miss out on this call, so I invested $70,000, with an average cost of around $71 per share.

After I bought the QQQ shares, I couldn’t sleep at night. I realized I was outside my comfort zone. Something inside told me to go ahead, even though deep down I was afraid. Was it greed? Was it the fear of being left out?

This investment didn’t end well, either. The QQQ fell to $20 a share and took many years before it reached my breakeven share price. I learned an important lesson about trying to time the market. I also learned investing can be psychological. Sometimes, it’s hard to stop your emotions from getting in the way of making rational decisions.

With any luck, you will learn from my mistakes, just as I did. Today, I follow these four simple rules:

  1. I make sure my investment portfolio has sufficient stocks for long-term growth, but I avoid taking an excessive amount of risk.
  2. I don’t own any individual stocks. Instead, I invest primarily in index funds that own the broader market.
  3. The only time I make any significant changes is when I rebalance my portfolio every year or so, to get my investments aligned with my desired asset allocation.
  4. I try to control my emotions by tuning out all the noise about investing and instead concentrate on meeting my written financial goals.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance.

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