I've been investing for almost 20 years now. That includes three bull markets, two recessions and two bubbles bursting. Yet, through it all, when I look over my investments in Quicken, I see that I've averaged a 21% return on investment and that my money has grown from just the $100 I started with in a stock into a portfolio that comes to close to $500,000. Granted, I've been adding money over the years as well, but the bulk of that growth is due to the market itself. It has made me think of the lessons I've learned along the way, both the good and the bad. Below are these lessons, hopefully to help you find investing success as well.
How I Began Investing
It all began back in the late 1990s, after I took an economics class in high school. I was fascinated by the stock market after reading One Up On Wall Street by Peter Lynch. True to his motto of going to the mall to find good stocks, I invested in what was then known as Intimate Brands. At the time, the company owned Victoria's Secret and Bath and Body Works (and was majority-owned by The Limited). I saw that every woman in the mall had her pink bags, and the store was always packed. So I convinced my Mom to open a custodial account at a discount broker and let me invest some of my money.
I held onto that stock for close to 10 years, enjoying the good times and the bad. It returned three times what I invested into it, not including dividends. While I was happy my first investment was a success, not all of them were.
Mistakes Along The Way
While my investment in Intimate Brands was a solid long-term investment, I fell victim to chasing returns with two other stocks. First was WorldCom. I bought this company during the dot-com boom. I remember turning on CNBC and getting excited as the share price jumped by $5 a day on rumors of an MCI or Sprint (NYSE:S) merger. The merger deal with Sprint fell through, but the deal with MCI didn't. Sadly, however, it turned out that the accountants at WorldCom were "cooking the books" as they say and overstating income and revenue.
The stock tanked. Foolishly not wanting to admit a mistake or realize a loss, I bought more shares on the decline. Then I bought more shares as it declined further. Eventually, the company went bankrupt and I lost everything.
The bad investing didn't stop there. In the early 2000s, I had also invested in Ford (NYSE:F). This stock went nowhere and eventually declined a good amount. Still feeling the sting from WorldCom, I cut bait when I had lost 50% of my investment. At least I learned from past mistakes by not riding it down further!
Finally, also during the dot-com boom, my grandfather gave his grandkids some money. I bought myself a new computer and invested what was left over. I got caught up in past performance and invested in a tech mutual fund. I was ready for the 60% return the fund experienced the last 2 years. Unfortunately, the bubble burst and I lost over half of my money. I sold out of the fund, licking my wounds.
What I've Learned
As you can see, my investing career hasn't always been a smooth ride. There have been many bumps along the way. But with these failures come learning opportunities, and I learned a lot. Here are the lessons I've learned:
Investing Is For The Long Term: There is a difference between investing and trading. Early on in my investing career, I was more of a trader than an investor. I was looking for short-term gains. This didn't work so well for me. Once I learned to focus on the long term and stay invested, I found investment success. If you really want to be successful in the stock market, you have to take a long-term approach. No one knows what the market is going to do over the short term. But over the long term, the market does rise.
Fees Add Up: I've invested in a handful of mutual funds, and it wasn't until my last job at a high net worth wealth planning firm that I realized how much fees ate into my return. Not only am I paying a fee for mutual funds, but that fee also eats into more potential gain through lost opportunity. To put another way, let's say you are on a 2,000-calorie diet and you eat a few slices of pizza that total 800 calories. Not only did the pizza cost you 800 calories, but it also cost you enjoying other foods. If you had eaten just one slice of pizza for 250 calories, you would still have 550 "extra" calories to use on other foods or meals. With investing, these "extra calories" are simply your money that could stay invested in the fund and compound and grow into more money.
Have Play Money: Most people fail at investing because they give into their emotions. They buy and sell at the wrong time because of fear and greed. It's understandable, since money is emotional. The second best way I have found to overcome this is by having two accounts. I have a play account and a long-term investing account. Most of my money is tied up in my long-term investing account, and its money I don't touch. My play account, though, is for me to buy and sell as I please. It allows me to be emotional without causing harm to my financial future. Over the years, the two accounts tell the true story. My play account is barely making money, while my long-term investing account has done extraordinarily well.
Automate Your Investing: This is the best way I have found to overcome emotions when investing, and my 401(k) plan taught me this lesson. I started out putting away $20 per paycheck ($40 per month) into my 401(k) plan. At first, I balked at the amount, thinking it will never turn into something meaningful. I ignored the account and looked at it a couple of years later. Those $20 investments twice a month turned into over $3,000! After thinking things through, I opened a mutual fund and began automatically investing $100 into it each month. Now I do this with all of my investments. This is why my returns have been so good. When the market crashed in 2008, I kept buying every month. Buying at a discount meant more shares and more money when the market finally rebounded. By investing all of the time, you take emotion out of the equation. Too many investors wait for the perfect time to invest. The perfect time is always now, since your money can start growing once you invest!
Ignore The Hype: Finally, you need to learn to tune out the media and the hype. They get you emotionally involved with the stock market all of the time. Tune them out. What happens today doesn't matter if you are a long-term investor. Focus on the long term. While the stock market may be volatile today, over time things smooth out and the trend is positive. Look at a boat in the ocean as an analogy. If you are close behind the boat (short term), the water is choppy as the waves are big (volatile). But as you move further away from the boat (long term), the waves dissipate and you barley notice them.
If you can learn from my mistakes and failures, you will be well on your way to investment success. It all comes down to the basics. If you can master these, you can experience success when investing in the stock market. The overall key is keeping your emotions in check, which is much harder to do than many like to admit. By setting up an automatic investing plan, you can keep your emotions in check. And when your emotions do try to take over, have a play account so you can act on the fear or greed without doing any real harm to your long-term wealth.