A few weeks ago I went to a meeting with a group of women investors that I found on meetup.com. I’m pretty new to the world of investing, so I’m always looking for ways to learn more and to make sure that I’m on the right track. Fittingly, the theme for the discussion was investing mistakes.
We met at a coffee shop for a few hours on a Wednesday night to discuss mistakes that the group had made and how to avoid them. I was the youngest person there, so I mostly just sat back and listened to where other women had gone wrong and what they wish they’d known when they were young. I took some notes along the way for my own benefit, but I thought I’d share them here.
Many of these weren’t new to me, thanks to the sage advise of many of my friends and family over the last few years. Others seem largely like common sense. But I’ll include them all in case they’re not quite to obvious to other people new to the game of investing.
1. Start now.
I’ve done a fair bit of reading about personal finance, particularly how to start when you’re young and clueless like me (or at least like I was a few years ago). The idea is that the earlier you start, the more time you have for your money to compound and your investments to grow. But one of the most notable stories I heard was how someone got a late start and was able to make up a lot of lost time anyway. She started investing for her retirement in her 40’s as a single mom and is now semi-retired and living comfortably in her 50’s. It took a lot of frugality and discipline, but she didn’t let her late start stop her from doing all she could to reclaim her financial future. And it paid off. Literally.
Is she where she would have been if she had started doing the same thing at 22? Of course not. And that’s why the pervasive mantra is to start young. But the bottom line should be to start. There are countless things that can get in your way of investing right away, but the best thing to do is to start as soon as you can, even if you’re not as young as you once were.
2. Don’t get stuck in “analysis paralysis.”
A common thread among the women in the group, and probably my biggest offense, is the inertia of getting started with investments or following through on something I’ve been meaning to do. Not investing at all or leaving your money to whither away in a savings account or money market account doesn’t get you anywhere. Taking the first step can be the most daunting and feel the most risky, but you can’t win if you’re not in the game.
3. Pay off credit cards every month.
This one sounds like it’s off the topic of investments, but anything with an interest rate can be considered an investment. In the case of interest accruing on debts like credit cards and loans, it’s analogous to having a negative rate of return. For example, if you carry a balance on your credit card with an 18% interest rate, you’re earning -18% on that money. If you pay off that debt, you’ve effectively made an 18% return, just by reducing the interest you owe to nothing. Carrying high-interest debt can take a serious chunk out of your effective returns, so paying off debt before investing often makes the most financial sense.
4. Don’t get duped by get-rich-quick schemes.
This is one that sounds so obvious, but it may not always be so blatant. Enter “multi-level marketing” businesses.
I had first-hand experience with friends trying to recruit me to a company like this, called Amway. The basic idea is that, unlike in a ponzi scheme, these businesses sell products. Each member gets a commission from the products they sell, so they can earn more by getting people to buy products through them. But just like a ponzi scheme, members earn more money based on how many other people they can recruit to sell products. Those who haven’t recruited anyone are at the base of the pyramid and as they recruit more salespeople, they move up in the company. But there are a lot of catches. First of all, you have to buy into the enterprise to get started in the first place — maybe $100s or even $1000+ to start. Then there are usually monthly sales minimums that you must meet to stay active in the company and to avoid losing your initial investment.
The people I knew who were doing this ended up largely buying products from themselves, things they wouldn’t have bought otherwise. So they were making a lot of money for the company, but not really profiting themselves. They were also on a constant mission to recruit other people, including me. At one point, I sat down with them and their recruiter for the sales pitch. The pitch focused entirely on the perks of being at the top of the pyramid, which required recruiting a lot of people who recruited a lot of other people, all of whom were selling a lot of product each month. The pitch ignored how long or how much work it would take to get there. The presenter was also unable to answer my simple business questions about how exactly the math works out so that everyone is making tons of money with a minimal amount of work, as he claimed on the surface.
These deals sound slick, so I can see how people fall for them, especially the young and ambitious with large social networks. I’d just like to remind them that the ferrari they’re standing next to in their facebook profile picture isn’t theirs and they were only allowed to stand next to it because they’re a pawn in a much larger game.
5. Don’t try to pay someone to motivate you.
One of the more subtle mistakes that came up at the meeting was a woman who spent more than $8000 on real estate sales coaching. Basically, she was paying a lot of money one and one consulting to help her get ahead as a real estate agent. She paid for weekend seminars and classes on top of her individualized mentoring. But in the end, even with all the coaching, her career in real estate never took off. According to her, the mistake she made was trying to pay someone to keep her interested, instead of doing something that she was passionate about all on her own.
I see how this can be a tough call. Especially in the rough economy today, everyone is looking for an edge. A little bit of extra career training may seem like a great idea and I think oftentimes it is. But when you go down the rabbit hole without thinking twice, you may be making a career of training, not doing. In the end, the endless classes and pep talks to continue spending money on these classes from the people giving them sounded a lot like those I heard in the multi-level marketing pitch.
6. Rebalance your portfolio.
Everyone has their own investment strategy in terms of how much risk they’re willing to take when investing. This can be expressed in the balance of assets in your portfolio. Over time, the value of different investments in your portfolio change. Some stocks or bonds will do better than others, so they will make up a larger percentage of the value of your portfolio, while a smaller percentage will be comprised of those investments that didn’t do as well. The principle of rebalancing (usually recommended annually) is to sell the top performers, reducing the percentage of your portfolio they take up and bringing things back to their original balance.
It doesn’t quite seem intuitive to sell things that are doing well, but this is exactly what you need to do. It makes perfect sense to think about buying low and selling high. This is how you make money through investing. Rebalancing your portfolio accomplishes just that. For example, you sell some stocks that have gone up in price, thus making a profit, and you buy more of the stocks that have gone down in price, hopefully getting them at a bargain.
7. Reinvest dividends and payouts.
The idea of having investment income is attractive. About twice a year, some of my investments pay out in dividends. Even if it’s only $50, it’s exciting to see my money actually making more money and it can be fun to think about how I could be using those dividends to add to my income. But there’s a time for everything and while I’m still young it’s just not worth it. By automatically reinvesting my dividends, I’m able to buy more shares and increase the dividend that much more for the next time around. By reinvesting, I still contribute to my net worth, but also do more to ensure my financial independence in the future, when maybe I’ll be living off of investment income. In the meantime, I’ve got a job that I can live on.
8. Get an independent financial advisor.
The more investing you do, the more complicated things can get. Luckily, there are professionals who dedicate their entire lives to understanding the ins and outs of the financial industry and can help you navigate it. But not all financial advisors are created equal. Women in the group emphasized over and over how important it is to get an independent, fee-only financial advisor.
The financial analyst in this group emphasized that the most reliable financial advisor is fee-only, meaning they have no attachment to commissions for any product. They can be expensive, but often worth for sound, unbiased advise. She mentioned that there are several categories of financial advisor that may be fee-only. Certified Financial Planners (CFPs) are one of the more common types that can help you to organize a financial plan and weigh in on financial decisions you may need to make. Certified Financial Analysts (CFAs) are similar to CFPs, but err on the side of rigorously analyzing data. She mentioned that they may not be the most personable people, but if you’re just interested in the numbers they may be the best option for you. The last option she mentioned was a Certified Investment Management Analyst (CIMA) who she described as being a “CFA-light”. CIMAs specialize as investment consultants, as opposed to doing more general financial planning.
9. Think about taxes.
I started my investments in an IRA. I knew that doing so would provide me with tax advantages, so I knew it was the right thing for me to do. But when I was ready to move beyond my IRA and start investing elsewhere, I began to realize how little I know about taxes. The tax code is always be changing. There can be different rules depending on your income bracket or whether your investments were long vs. short term. Things even change depending on the year.
While it’s important to be careful when preparing tax returns, thinking about and planning for taxes related to investments have to happen long before March or April. It’s important to realize the tax implications of putting money in different investment vehicles, from real estate to IRAs to brokerage accounts, before you actually put the money in.
10. Manage your own money (or at least know how).
I’ve heard this advice personally several times now. Learn how to manage your own money. Better yet, actively manage your own money. But at the very least have a good sense of how much you have, where it’s going, and how it’s happening. This can avoid a lot of frustration and confusion down the road. Circumstances can change unexpectedly, from a death in the family to a divorce, forcing you into the driver’s seat of your financial life. Or maybe you’ll just help yourself avoid getting swindled by an unsavory financial planner. Whatever it is, there’s no downside to knowing how to handle your own money.