OUR PAST INVESTMENT errors give us strong clues about how we’ll behave in future. They also contain lessons we can put to good use.
Since I started investing, I’ve occasionally assessed my performance—but not in the traditional sense. Rather than evaluating my portfolio’s results, I’ve been pondering my response to the errors I’ve made.
My first mistake happened before I even began investing. I avoided the stock market because of fears of a potential correction. I won’t do that again.
What other errors am I guilty of? The bulk of my stock market exposure is in value-oriented actively managed funds. They have similar investment styles, so—not surprisingly—there’s some overlap in the stocks they own. That leaves me relatively undiversified. Fees are an additional issue: Some of these funds charge as much as 1.8% in annual expenses.
Aware of these shortcomings, I decided to change course in early 2020. I invested in a low-cost S&P 500-index fund—a strategy that’s likely to deliver better long-run results. That doesn’t mean I’m not worried about the index’s current level or the fact that a big chunk of the S&P 500’s earnings growth over the past five years has been driven by just six technology stocks. My plan is to slowly add stock funds exposed to other countries, as well as some bonds.
In an effort to diversify further, I also took two minor positions in a couple of crowdfunded startups. Venture capital investing has grabbed my attention in recent years. You might argue that this will be lost money—and you could be right. But I could also make 10 times my money. I feel the premium I paid for this “option” isn’t too big. An unbreakable rule I imposed on myself: I won’t allocate more than 5% of my investment money to private companies.
Even if the startups weren’t a mistake, I know I committed a big error as recently as March. As the market tumbled, I bought a fistful of individual stocks. Some are familiar names like Coca-Cola, Pinterest, Lyft, AB InBev and 3M. I even bought Norwegian Cruise Line when it traded at around $10 a share. Despite the high uncertainty surrounding the cruise business, I saw it as a reasonable bet: If things go well, maybe I could triple my money. But if that happened, I would never get rich: Precisely because of the risk involved, I didn’t invest much in the first place.
In total, I invested in about 10 different businesses, including a few small European companies. Sound like indiscriminate buying? That isn’t the worst part. What made this a bad decision is that I didn’t do the research necessary to justify investing in individual companies.
I invested in these companies merely because I’d read about them, or because they seemed reasonably priced compared to some analysts’ fair value estimates, or because they’d experienced significant market drawdowns. None of these is a good reason to invest in a stock.
What drove my buying spree? As the market fell 30%, I felt an urge to jump in. “This is a once-in-a-decade opportunity,” I said to myself. That may be true—but I hadn’t done my homework and it didn’t take long for me to start divesting my individual stocks. My broker is the only one who benefited from these transactions.
I wish there was a happy ending to this article, but I am certain I’ll keep making mistakes. How can I be so sure? For starters, I still haven’t divested all of the individual stocks I bought. But, with any luck, I’ll also keep learning—and I have a feeling there are many more lessons left for me to learn.
Marc Bisbal Arias holds a bachelor’s degree in business and economics, and is a Level I candidate to become a Chartered Financial Analyst charterholder. He started his professional career at Morningstar, performing research and editorial tasks, and is currently employed by Dow Jones in Barcelona, Spain. Marc’s previous articles include Fear of Falling, Mind Over Money and The Upside of Down. Follow him on Twitter @BAMarc.