To give myself a little time off, today’s post is a Guest Post, and you know my Opinion of Guest Posts normally, however, this is a post by someone who I trust and also it is an honest explanation by an experienced finance person of the mistakes they have made in their personal finance lives, and those are the kind of Guest Posts I like (i.e. from the heart and personal). Who is TuskTrader? I’ll steal some copy from Preet’s web site as a point of introduction:
This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
Hello readers! I am very honored to be contributing a piece to one of the best personal finance blogs in Canada. I have been asked to share my own investing mistakes. I began this process by recounting my own investing history year by year, and compiling a list that grew shockingly long as the minutes ticked by. It was ego battery at it’s best. The selection process for the top 5 was not as hard as I thought it would be. My biggest mistakes are also the ones I learned the most from and are what guide many of my decisions I make now.
Being a trader, many readers might think the list I am about to reveal to you all will be a big list of trading disasters. If you fall into that category, you will be surprised. As with many people, it is not the actual investment or particular trade that causes the anguish and unfortunate outcome, it is the lack of knowledge, lack of discipline, and other activities surrounding the investment portfolio decisions that have caused most of my regrettable mistakes. The losses I have taken in my own trading account have rarely been due to out of control losing trades. I have been very good at setting appropriate stop losses and I have entry and exit parameters well-defined before I get into a position. Now that I have stuffed in at least one compliment about myself in this piece, I feel more secure about revealing to you all my biggest investing mistakes and regrets.
I do not have the longest investing history. I have actually been a trader longer than I have been an investor. If you are young yourself or if you have someone young in your life, please share these with them. I think the new investor might get the most from my errors.
The first two mistakes I want to discuss have a lot to do with personal money management but they dramatically affected my overall investing performance. They prevented me from investing anything at all and as we all know, the longer your time horizon, the more choices you have to be a successful investor.
1.Not having a savings account.
It took me until my first job outside of school to figure this one out. I had been living with only a chequing account for my life up until that point in time. I should have been utilizing two accounts the moment I was generating an income. I started to have some form of income around the age of 14 (not a lot, but I never had an allowance so I did find odd jobs). I was reasonably good at saving cash so I never thought about it. I most regret not having two separate accounts thorough out university. I worked while going to school and saving up for tuition and expenses would have been much easier if I had just opened a savings account. If you only have a chequing account, you do not have the ability to pay yourself first. You also lose out on the momentum that builds as you watch your savings build. Once I opened a savings account, I began to save 10% more of my income. As a student, banking fees are also usually non-existent, and I should have made more use of that bonus feature. What I learned overall from this was to make sure I am setting myself up for success, not just working at it. I am always now fully aware of why I have particular investments in particular accounts. A smart investment will always start with a smart set up.
2 Emergency fund error.
The second mistake I made was waiting until I had my entire emergency fund set-aside before starting to save for my investable funds. Dumb. It took me over a year to get the emergency fund I thought I needed. It was a big waste of a year. I was single, no dependents and every financial obligation I had I could adjust within 60 days if I needed to. I didn’t even have a houseplant. I should have been saving for both funds concurrently. I also made the mistake of doing nothing with that fund for many years. I just left it sitting aimlessly in a random bank account. I now have it in a secure place, earning a small amount of money. I plan to have an emergency account for the next 60 years and overtime this strategy will really add up. I will also be keeping up with inflation so I will only have to add to it as my lifestyle and financial commitments increase.
3. Employee Stock Plan.
I did not sign up for the employee stock plan the minute I was hired at a firm.
This is by far the mistake that angers me the most about my investing past. It is the most undeniably basic, simple and smart thing a person can do and I did not do it. This is free money. Pick it up. You can even view it as a raise you are not accepting. Many Canadians begin careers (and often spend entire careers) in a variety of fields at large to medium sized public companies; from banks to energy firms to retail establishments. If they have a stock plan, enroll in it the second you are allowed to. When I finally did sign up I was amazed at how quickly I was able to build up a large dollar figure in stock. I became slightly obsessed with it. I started to look around for firms with better employee stock programs. I even considered attempting a career change to WestJet due to their generous employee stock program.
4. Risk Tolerance got too high.
Traders are notoriously bad investors because their risk tolerance is too high. It is like a racecar driver who constantly gets speeding tickets on the why home from the track. They lose perspective of how fast they are going. The same thing happens to traders. They lose perspective of what an appropriate risk tolerance feels like. I had no sense of panic, no sense of the magnitude of what was happening to my portfolio as a whole when things were going wrong. I was adhering to stops on individual positions, but I had no concept of how to balance the risk of the portfolio. I had to start to look at less risky options. I had to start to set tighter stops for myself and I had to stop focusing on just individual stocks but how they were fitting into my overall plan. I basically had to stop trying to trade my investment account. I had to focus on investing it. Initially it actually felt like lowering my expectations when really I what I needed to do was to change my expectations. I spend my days as a trader looking for active stocks with a lot of movement, and I had to retrain myself to find “boring” stocks with investment potential. Boring is right up my alley now. I have also become very conscience of not letting work behaviours creep into my portfolio.
I spent a number of years with very little to no bond exposure is my portfolio. I attribute this fault to the fact that I am an equity trader and I viewed bonds boring (FYI, they aren’t). I also discovered I am quite lazy when it comes to research. Every equity I bought and sold, I knew from work (in a compliance approved manner). I was engaging in very little research work outside of my job. I was working with equities all day and so I invested in equities. Bonds were different. I knew what they were, but that was it. I would have had to do some research (heaven forbid) and I really wasn’t interested. So I didn’t….. For a long time. This was dumb and it really did affect my portfolio as bonds were doing very well for investors at the time. I really missed the boat and I have no one to blame but myself. Overtime and through my mistakes, I have discovered what aspects I am good at in investing and what aspects I am bad at. I now consider myself the lazy disciplined investor. Odd, but it’s what I am and I make sure I take that into account when I create my investing strategies.
I hope everyone can learn something from my mistakes. I know I have.
I appreciate your candor as well (BCM).
This is a great article! I’ve started giving copies to my clients who are just starting out creating a solid financial future. Thanks!