Most articles about investing written during the month of January will tell you how to make money for the coming year (like it’s easy). These articles written by so called “experts”, will list a few individual stock ideas and maybe a mutual fund or exchange traded fund (ETFs). These ideas are selected by looking at the top performing investments of the previous year. That is called look back basis.
I’m not going to write another article about making money this year that would be a waste of your time. I have no clue what investments will make money this year. No one does.
Instead, I’m going to focus on ideas that I am fairly certain will lose you money this year. I know this because I have learned from experience. I have lost a lot of money by doing the below items.
Reading bearish investment websites.
I love a good conspiracy theory. I also love a good bearish article. Its fun to read and the authors always sound so smart. It seems like I’m not alone, Morgan Housel from the Motley Fool recently wrote an article exploring this topic.
However, pessimistic articles are click bait and they serve no purpose other than to get the person writing them notoriety or the company publishing it page views.
From 2009 through 2011 I was obsessed with the blog Zero Hedge. The authors had convinced me that the world was on the verge of collapsing. I thought Greece would leave the Eurozone, the US was going to go bankrupt, the market was going to crash and there would be an all-out war. Look at the below headlines pulled from Zero Hedge, don’t the headlines immediately grab your attention?
Is It Time For The Financial World To Panic? 25 Reasons Why The Answer May Be Yes
September 23: The Beginning Of The End For Merkel… And The Eurozone?
It’s Going To Implode: Buy Physical Gold – NOW
Getting your investing advice from CNBC
I like CNBC, I watch it every day, it’s entertaining but getting investing advice from someone on TV is an awful idea and a surefire way to lose money. Shows like Fast Money and Mad Money are meant to be entertainment not investment advice.
Back in 2005 I would come home from school and trade Jim Cramer’s stock ideas. I had some winners, I had some losers. I was treading water. Cramer didn’t know my situation, he didn’t know what was best for me. His job was to come up with actionable trading ideas. He does a really good job of that. His ideas aren’t tailored for your situation, the ideas are created for a general audience.
One of the problems you get when you are reading investing websites and trading of CNBC commentary is you end up paying way too much in trading commission. Every time you buy or sell a stock, there is a cost (commission) that gets paid to your broker (Charles Schwab, TD Ameritrade, Scottrade, E-trade, etc). The cost of these trades are typical $5 to $19.99. It doesn’t sound like a lot but it can add up.
Pretend you are paying $19.99 a trade. If you decide to invest $500 in a stock you heard about on CNBC you have to make $40.00 just to get back to breakeven. That would mean you would need a return of 8.00% just to get back to break even (40/500=.08=8.00%).
Chasing investment fads
Markets work in cycles. Typically they last about 7 years. Five of those years are good, two of those years are bad. The economy is so interconnected that even if the fad isn’t traded through the stock market it can still make the market go down.
In my lifetime, there have been 3 investing fads I can think of. During the 1999-2000 time frame there was the dot-com bubble. I wasn’t investing or trading during that time, I was still in junior high. I have studied it and it was an amazing bubble. During 2006-2007, people were flipping home like they were stocks. In my parent’s neighborhood, one home turned over 3 times during the 06-07 time period, only to be deserted from 2008 to 2011! Now, the major fad seems to be startups. It seems to me that a lot of people these days “work for a startup” or are “startup investors.”
Investing: A Better Idea
All the above mistakes I have made and those mistakes held me back in my early twenties from making financial progress. I was basically running in mud. I started working fulltime in October 2008, a good strategy would have been to contribute some portion of my salary to a ROTH IRA and invest in a low fee index fund.
I wanted to see how badly I hurt myself so I decided to run a backtest. I used software we have at my firm (RPA Wealth Management) to backtest this strategy. My inputs are $250 a month into a ROTH IRA and investing that $250 a month in the Vanguard 500 index fund. The results are below. (Remember, past performance is no indication of future returns.)
It’s pretty amazing that $250.00 a month can turn into $34,000. Though the total contributions in this scenario is $22,000 that means the portfolio gained $12,000. A good goal is to try and max your ROTH IRA contribution each year. Currently the max is $5,500 my scenario assumes $3,000 which is well below the max contribution.
Good luck in 2016 and remember to learn from me and don’t make financial mistakes.