Top 5 investment mistakes – Teaching my Kids part 23.
It has been a long time since I posted a post in my Teaching my Kids series. So, it is time again, and this time it is a blog about my investment mistakes.
As frequent reader of my blog you know that I’m also writing posts to try to educate my kids. I know they are still very young (9 and 11) but it is never too early to start. And they can read these blog posts later on in life 😉 (This is probably the case, because they don’t speak or read English very well at this moment!).
This is another blog post to keep the “snowball of knowledge” rolling.
I think when you educate kids about money, they will benefit from it for the rest of their lives. Or as the saying goes: “What is learned in the cradle is carried to the tomb”. And to educate your kid is your responsibility as a parent.
Mistakes cost Money
I have been investing since I started with my first job, more than 20 years ago. And I’ve been learning ever since. This learning went through trial and error. I have made some amazing buys, of which I still have the benefits today. But also I made some mistakes that has cost me (a lot of) money 😣. Okay living is not a smooth ride and the same goes for investing. In 2014, after some learning time and after sowing my wild oats, I have changed my investment strategy and saw the light. I started with Dividend Growth Investing.
One important rule that I’ve learn the hard way, is that investment mistakes cost you money. And that is why they must be avoided. So, with this post I hope to protect my children from the same mistakes I’ve made. And of course, they have the right to make their own mistakes and learn from them. But hey, how nice is it if they have already some knowledge and with that have a head start.
Here are my top 5 investing mistakes
1. Start too late
In my humble opinion the basic principle of good and sound investing is that you let time do its work. And let the eighth wonder of the world do its magic.
I’ve started investing after university when I had my first job. If I started earlier and had invested my allowance, I would have had much more money. And by this, would be reaching Financial Independence way earlier. So, start as early as possible in life with investing. The earlier you start, the longer you can enjoy the power of compound interest and the sooner you will reach your goal.
A calculation example shows which returns are possible by letting time do its work. If you invest € 10,000 for 40 years with an average return of 8%, you will earn about € 200,000 more than if you only invest this money for 20 years. Thanks to the interest on interest effect.
Lesson 1: start earlier and let time do the rest.
2. Paying excessive costs
Investing costs money. The purchase and sales costs are one-off, and they are very clear. You can influence these costs yourself by choosing your own broker. Preferably a cheap and good one. And what a good broker is, is a personal choice. And cheap isn’t always the best.
There are also some costs that you don’t see at first glance and that are the management fees. These costs have a major impact on the ultimate value of your investments. A few percentage points more or less do not seem to make much difference, but if you calculate this you will miss out on a substantial return. You can find these costs on the website of the ETF’s or mutual funds. Just look at the TER-ratio (Total expense ratio).
Generally, simple broadly diversified index funds or ETF’s are cheaper than actively managed funds. This because they don’t do many buys and sell in a year. And high cost fund can be acceptable if the return is better than a lower cost fund. However, in practice, actively managed funds do not appear to outperform a passive index fund in the longer term. So, pay attention to the ongoing costs before you buy funds.
With a good ETF you can easily earn about 2% dividend yield every year. And which ETF’s am I talking about, well for instance, look at Vanguard WVRL (for my Dutch Readers) or VTSAX (for my US friends).
Now that you are reading this, and you look at my Portfolio, you see that I don’t have any ETFs (yet). And you may ask, why not? Well I want to try to live of my dividends in the future, and with a 2% yield my Vrijheid Fonds needs to be much fatter than with a 4% yield. That is why I’m owning a couple of individual stocks and some mutual funds. Of course, these mutual funds have a low TER-ratio (less than 0.5). And with these stocks and mutual funds I can achieve a higher weighted dividend yield for my Vrijheid Fonds. Every year I calculate my weighted dividend yield and in 2019 it was 3.49%. This is a lot higher than the 2% from the above-mentioned ETF’s.
However, this comes with a price. Besides a higher TER-ratio (WVRL has 0.22) and thus higher costs, it also takes a lot more time. I have to analyze these individual companies, keep track of my portfolio, reinvest my dividend, etc. I take this for granted because I enjoy doing it every day.Nobody can predict the future, so maybe within a couple of years I going to spend my time differently and sell all my stock and only buy ETF’s. Who knows!
At this moment I’m reading The Simple Path to Wealth by J.L. Collins, who is a really big fan of ETF’s, and from him I’m learning that with little effort and time you can easily make 8% or more just by buying ETF’s and let time take care the rest (Since January 1975 the market (S&P500) has averaged an annual return of 11.9% with dividends reinvested).
I will write my book review later on. For the Dutch readers who can’t wait, I can recommend this book, it is available at Bol.com. Just click on the book title: The Simple Path to Wealth.
(This is an affiliated link. By clicking on this link and buying at Bol.com I earn a little extra money. This is at no cost to you. You are helping to keep www.polliesdividend.com alive)
Lesson 2: Watch out for excessive investment cost.
3. Act from emotion
There is regular panic on the stock market: there is always a crisis somewhere, or a healthy correction of the prices. On average every 7 years there will be a downturn in the markets. Falling stock prices often involve panic sales, followed by panic purchases for fear of missing the boat.
It is unwise to invest with (strong) emotions, simply because you cannot make rational decisions. Negative emotions have a negative influence on your investment decisions, but so do positive emotions. If you feel overly sad, angry, anxious, happy or confident, you shouldn’t invest for a while. Emotions are a bad advisor when it comes to investing.
Every day the internet and newspapers are full of news and stories about investing. Nice to read, but not good to base your investment decisions on. Especially in times when the markets are going down, you read a lot of panic messages. It is best to ignore this and stick to your investment plan.
Lesson 3: Don’t let yourself get distracted by news and your emotions. Just stick to your plan!
4. Do not spread
Investing always involves a certain risk. But you can lower the risks by investing in different sectors and assets. This is called diversification.
It may seem attractive to invest in a single high-performing stock. But for a good overall result, wide diversification is a much safer option. So, diversification means that your portfolio has to consist of more than 1 stock. But what is a good number of stocks to hold in your portfolio? Let me first be clear, there is no single correct answer. It depends on the person who you are and on a lot of different factors, such as your time horizon. A little search on the internet shows that with 20 to 30 stocks you are having a good diversified portfolio.
At this moment, my Vrijheid Fonds consists of 27 different Stocks and 5 different Mutual Funds. I personally think 30 different stock is the max for me. Why you ask, well I must be able to follow all these funds well and that takes time. And with max 30 this is still manageable.
If you think this is too much work, you can also choose to buy an ETF that reflect the global economy. These ETF’s will automatically follow developments, run less risk and are very well diversified 😄.
Lesson 4: Be well diversified by owning 15 till 30 companies or one or two good ETF’s.
5. Try to time the market
This is actually one of the biggest mistakes a (passive) investor could make. A lot of people think they can predict which way the market goes. In my early investing days, I used to wait until the price of a stock got better. I often say my predictions blow up in my face. Because the market went the other way than I expected. Because of this I missed some nice buying opportunities, and I also lost some money because I sold too low.
What I’ve learned is that it is impossible to consistently predict the short-term moves in the stock markets. There’s a lot of people who get it right sometimes. But nobody gets it right consistently.
Lesson 5: Don’t try to time the market, you will get it wrong. Time in the market beats timing the market.
These are my top 5 investment mistakes of which I have learned. With writing these mistakes down, I hope my kids don’t make these same mistakes. I have deducted 5 lessons from my investment mistakes.
- start earlier and let time do the rest.
- Watch out for excessive investment cost.
- Don’t let yourself get distracted by news and your emotions. Just stick to your plan!
- Be well diversified by owning 15 till 30 companies or one or two good ETF’s.
- Don’t try to time the market, you will get it wrong. Time in the market beats timing the market
I know that with kids it works far better to tell 1 or 2 things and not 5! Therefor I have put these lessons in one sentence:
Start on time, invest in widely distributed and cheap funds, don’t trade to much and let time do its work.
This is my 23rd blog post about teaching my kids. I hope my kids at the age of say 18, will have all the financial knowledge I’m having right now. This would be a huge advantage for them! And that’s why I started these blog post series.
What do you tell your kids about money and investing? What are the money lessons you have learned and teach your children? I like to hear from you!
Help me get the “snowball of knowledge” rolling and share this post.