If you check on your investments more than once a month, you’re costing yourself money.
I get it. It’s not easy to save money these days with the cost of living skyrocketing seemingly, everywhere. And we get bombarded every day with headlines about how someone became a millionaire investing in some sh*tcoin or buying Tesla stock.
Our dollars are stretched thin, and personal finance writers are shoving the FOMO right in your face every day. That makes it really tempting to abandon your “boring” buy-and-hold investment strategy and start making some moves to level up your returns.
But remember, for every Dogecoin millionaire, there are loads of people who piled in at the wrong time and lost their shirts.
(Except, nobody writes snappy headlines about these people.)
Here are three common investing mistakes that smart, patient investors avoid.
#1 — Speculating
The difference between investing and speculating comes down to the level of risk you’re taking. All investing involves risk, but not all risk is created equally.
Let me repeat that: not all risk is created equally.
There are two types of investment risk. To understand the difference between them, let me contrast investing in an index fund vs. Tesla shares.
Investing in both Index funds and Tesla exposes you to Systemic Risk, the risk that the entire stock market will crash.
Investing in Tesla also exposes you to idiosyncratic risk, a risk that is specific to Tesla, like if the CEO Tweets something stupid to make the stock price fall 10%.
Systematic risk follows you wherever you go, but index funds can diversify away idiosyncratic risks.
I’m not saying that buying individual stocks is always speculative. If an investment is made after a lot of thoughtful analysis of the fundamentals of the company, that’s one thing.
But if you invest in a stock or a cryptocurrency or any other investment because you read an article telling you that asset was going to the moon, then you are speculating.
If you speculate you could win big and someone will write an article about you. The most likely scenario is that you lose big, and the bloggers forget about you.
The rational thing to do is to never speculate. But I get it, speculating and gambling can be fun. If you know that you simply cannot help but indulge in speculation, then create hard and fast rules about how much you will speculate.
Personally, I dedicate 1% of my portfolio to speculation (crypto, stock-picking, etc..), but the other 99% of my portfolio is in low-cost index funds. It allows me to scratch that itch to “have fun” and gamble without jeopardizing my finances. It’s like going to the Casino with $50 with the expectation that you’ll lose it but have fun in the process.
#2 Dollar Cost Averaging
If you had $10,000 that was earmarked for investing, would you invest it all at once?
Many people wouldn’t because they are afraid of the nightmare scenario where they invest $10,000 today, and then the stock market crashes tomorrow, and that $10,000 turns into $4,000.
That’s why many people turn to an investing strategy called dollar-cost averaging, where you slowly invest your money over time. For example, instead of investing the $10,000 all at once, perhaps you invest $1,000 per month for 10-months.
Remember that systematic risk we just talked about where the entire stock market goes down? Yeah, that never goes away.
Dollar-cost averaging feels safe; if you only invest $1,000 today and hold $9,000 in cash, you won’t be hurt by a market crash.
It just means taking risk later: whether you invest your $10,000 today or over a 10-month period, eventually the entire $10,000 will be invested, and a market crash is as likely 10-months from now as it is today.
A paper published by PWL Capital in 2020 examined historical data in Canada, the U.S, the U.K, Australia, Japan, and Germany and compared how often lump-sum investing outperformed dollar-cost averaging over a 10-year period.
By implementing a dollar-cost averaging strategy, investors’ returns were 0.38% lower per year over the 10-year period.
If you feel the need to implement dollar-cost averaging, that is a clear sign that you have more risk in your portfolio than you can handle.