Mistakes – I’ve had a few! Since I decided to get serious about investing, I went through a range of strategies. I jumped in with very little experience and learned along the way. A lot of these are good strategies, but I just didn’t execute them well. Or they may just not fit my liquidity/risk/other needs. Let’s see what didn’t work so well for me.
This one seemed obvious. Pick stocks that appear undervalued by the market. Only one problem – I had no informational advantage over the market. Yes, there are indicators (low P/E, for example). “This is easy!” I thought.
I didn’t put enough work into evaluating these companies. I was essentially guessing the number of jelly beans in a jar at a carnival. My individual guess would surely be too many or too few jelly beans. And most likely, the average of everyone’s guess (the market) would be nearly correct. Why did I think I was smarter than the market as a whole? Lesson learned.
Picking the Bottom and Timing the Market
This one seemed too easy. I’m embarrassed to say I thought this was a viable strategy at one point. Find a volatile stock and time the purchase at a low point in value. I loved 52-week lows. How could it possibly not go up?
It’s commonly referred to as “catching a falling knife.” And, my good friend described it as “running in front of a train to pick up a nickel off the train tracks.” If only I had heard these phrases earlier. There is something to be said about momentum. Another lesson learned.
Looking at historic returns for any long-term market period gives me comfort. As long as I hold a long-term view, I am perfectly comfortable adding to my positions even at all-time highs.
I am sure I will come back to this one often in my life. I’m still on the fence about it. I’d love to hear more arguments for and against it.
- Potentially high initial return on investment
- Easy to secure leverage
- Steady monthly income when occupied
- Unpredictable expenses
- Unpredictable tenants
- Continuously hands on
- Can not access capital easily on short notice
- Requires large investment for a single product
- Lack of interesting available properties in my local area (Denver)
I still like the idea of collecting rent. I have seen it work out marvelously. But, there is something to be said about investing in stocks and collecting dividends almost entirely hands-off.
My original jump into dividend investing was funded with my savings intended for a property. I realized I could save for a few more years to have enough for a down payment, or start making returns on my money now. I still believe I could collect a higher monthly return with a rental property, but for now I am enjoying completely passive investments.
Picking Individual Stocks
It’s really fun to pick an individual stock and imagine hitting it big after 20 or 30 years. I’ve accumulated about 42 stocks I like. I have seven of my early picks marked to sell eventually and shift into my dividend growth strategy, so that will leave 35 core holdings.
Going back to the jelly bean example – I no longer try to pick the exact number of jelly beans when I buy a stock. I might buy at its all-time high, and I might pay less attention to some fundamentals as long as I believe it is a good prospect.
But, lately I’ve been listening more to people I consider patient, smart investors. Low-cost ETFs are like looking at the average of everyone’s guess at the number of jelly beans in the jar. It’s boring, but so far my individual stock picks are performing the same as my total market fund. My goal is to add to my total market fund until my taxable account is one half stock picks, and one half total market ETF.
So, I no longer think I am smarter than the overall market. I don’t pretend to know when a stock is at its bottom. Real estate is still intriguing, but is probably for another time for me. And, the easiest, most hands-off investing style at all may be to just keep adding to a total market ETF as if it was a savings account. For the first time, I feel like I’m figuring out how to do this!