There’s an ancient Greek myth about a guy named Icarus. His father created wings made of feathers and wax. “Don’t fly too close to the sun,” said his father, “or the wax will melt and you’ll come crashing back to Earth.” Icarus ignored the warning and plunged to his death.
This story wasn’t supposed to keep Greeks from building wings. It warned people to heed good advice. We can crash, burn and learn from our mistakes. But learning from the mistakes of others is a lot less painful.
Market Timing Melts The Wax
Market timing is a common mistake. Some investors wait for the right time to buy. An election is coming up, oil prices have plunged and Larry Loseitall predicts a stock market crash. But markets aren’t predictable. If they were, CNBC’s talking heads would all be billionaires.
Mark Zoril is a financial advisor with PlanVision, in Plymouth, Minnesota. In early February 2016, one of his clients had $100,000 to invest. Mark recommended Vanguard’s Balanced Index Fund (VBIAX). “The client wanted to wait until the markets settled down,” says Mark. But he should have invested as soon as he had the money. If he had done so in February, he would have gained 11 percent.
Author William Bernstein probably says it best. “There are two types of investors: those who don’t know where the market is headed, and those who don’t know that they don’t know.” The best time to invest is as soon as you have the money.
Savings Accounts Pluck Feathers
Some people think that stocks are risky. But savings accounts, because they lose to inflation, pluck feathers from flying birds.
Scott Smith is a financial advisor with Olympia Ridge LLC, in Rochester Hills, Michigan. He saw this firsthand. Two years ago, he met a client who had recently retired. “I’ve saved well,” she told Scott. “But I’m worried that I won’t have enough money.”
“She had been saving for 40 years,” says Scott. “But she had put the money in savings accounts, checking accounts, and CDs.” Instead, if she had invested $3,000 a year in Vanguard’s S&P 500 Index, she would have almost $2 million. She has only a fraction of that today. Savings accounts and CDs don’t beat inflation. Long-term, that makes them riskier than stocks.
Don’t Underestimate How Long You’re Going To Fly
One of my friends is retired. “When I was working,” she says, “I spent like there was no tomorrow. But now I’m asking, ‘Shoot! What if I live another 30 years?’” Many people will live a lot longer than they think. Expecting a short life could be costly.
Mel O is a Las Vegas, Nevada based Certified Financial Planner with Hot Moon Financial. Back in 2011, one of her clients asked her to sell his entire IRA portfolio so he could take a trip to Panama. Mel asked, “Are you planning to move there?” But the guy was tightlippped.
Mel suggested that he could sell just enough to pay for his trip. He could keep the rest invested. “I explained how his IRA would be affected by taxes and penalties. But he still wanted all the money.” Mel thought it was a bad idea. She refused to personally take part in the transaction. “I told him if he wanted to remove his money he could call our back office and they would process his request.”
One month later, the guy came back with a confession. “I thought I had cancer,” he said. “But my scans came back clear.”
He thanked Mel profusely for not selling his investments.
Don’t Bet Your Future On A Single Flying Duck
Two years ago, I spoke to some Google employees in Singapore. Most of their money was in Google stock. It’s smarter to diversify.
Ed Vargo is a financial advisor with Burning River Advisory Group inCleveland, Ohio. He had a client who wished she learned this lesson. In 2006, the client worked at a bank. “She had just over 1.2 million dollars in her 401(k),” says Ed. “It was all in the bank’s stock.” Ed tried to convince her to diversify. But she was convinced that the shares would keep rising. Instead, they plunged during the financial crisis and never recovered.
Today her portfolio is worth 70 percent less than what it was worth in 2007.
Don’t Confuse Luck For Brains
In 2009, professors Brad M. Barber, Terrance Odean, Yi Tsung Lee and Yu Jane Lui published, Just How Much Do Individual Investors Lose By Trading? They found that stock market indexes beat active traders by 2 to 3.8 percent per year. Their study showed that only 1 percent of all day traders are able to predictably profit after fees.
Day trading is a lot like a casino. If you win right away, you could get hooked to keep playing. That’s what happened with one of Rob Drury’s clients. Drury, an Executive Director for the Association of Christian Financial Advisors, had a young client who quickly turned $100,000 into over $750,000. “I recommended that he diversify his portfolio,” says Drury. “But he didn’t. He subsequently lost the lion’s share.”
Smart investing isn’t tough. Invest in a diversified, low-cost portfolio of stock and bond market index funds as soon as you have the money. Ignore financial predictions. Invest regularly and don’t underestimate how long you’re going to live. Don’t gamble (or day trade) with your retirement money.
You could learn from your mistakes. But it’s better to learn from others who have already crashed and burned.