I have sold more than $9 billion of stocks and bonds in my career - from start-up IPO’s to zero coupon bonds. Here is what I have learned are the four of the most common mistakes investors make—and how to avoid them.
1.Failing to take advantage of compounding. That's essentially returns you get on your returns. And over time, it can really add up. Let’s say you started at age 21 and invested $300 a month for eight years until you are 29, investing a total of $28,800. Even if you don’t invest another penny you will have close to $2 million when you retire at 65, assuming the market continues to compound like it has over time (at 10 percent annually on average).
If your friends don't start until they are 29 and invests $300 a month until they are 65, they will have invested almost $140,000. But the amount realized through compounding will be nearly $300,000 less! They will be investing longer and put away $110,000 more—and they will end up with less money to retire on.
Let’s be more realistic. While the idea of saving $1 million may feel like a near-impossible feat, putting away just $300 or so per month in starting when you are 30 seems completely reasonable—and that still gets you to the million-dollar mark by retirement age, provided you’re disciplined and start early. You can reach this mark by saving only $126,000, which is $300 a month for 35 years. If you don’t have
$300 extra to put away today I have given you many tips over the past few weeks to earn an extra $300 a month.
So - here’s what it $300 a month will look like for 35 years until you are 65:
Age Amount Saved
Okay, deep breaths. I’m going to walk you through these targets, and explain why they’re more reachable than you might think—and why, if you’ve hit 30 and haven’t saved anything, it’s not too late.
But first, let me say that I’m a big believer in using round numbers for simplicity’s sake. So for now, let’s set aside inflation, fees, taxes and dividends. Yes, those things are important, but it’s more important that you just get started—and track your progress.
The first thing you’ll probably notice about this chart is that your money doubles every seven years. I’m basing that on an investing concept known as the rule of 72, which says that if you earn 7.2 percent interest annually your money doubles in 10 years. Roughly, the reverse is true, as well: If you earn 10 percent on your money, it doubles in 7.2 years.
Bottom line: Time is your greatest asset when it comes to investing. The sooner you start, the more time you have to benefit from compounding.
2.Trying to time the market. In the last two decades, there's been about an 8.2 percent compounded annual return for the S&P 500. In the last 52 weeks there has been a 30.6% return. If you wait on the sidelines to try to time the market your returns will drop dramatically. For example, according to an analysis by the Schwab Center for Financial Research if you missed the 10 best trading days in the last 20-year period, your returns drop to 4.5 percent – almost HALF of the annual return! You need to invest for the long-term, and not to panic-sell when the market dips.
Let’s talk about how the market behaves and learn some market terms. We have all heard the news talk about a bull market, a bear market and a market correction. But what does this actually mean to you and me?
Bear market. The usual definition is that a bear market happens when stocks decline at least 20 percent from their peaks.
Correction is when stocks fall 10 percent.
Bull market is when stock prices are rising or remaining the same.
How often do corrections and bear markets happen? From 1900 through 2013, there were 123 corrections - about one per year- and 32 bear markets - one every 3.5 years.
How long do corrections and bear markets last? In the average correction, where stocks fall about 10%, the market fully recovered its value within an average of 10 months. The average bear market lasts for 15 months, with stocks declining 32 percent. The most recent bear market lasted 17 months, from October 2007 to March 2009, and shaved 54 percent off of the Dow Jones Industrial Average. Bear markets are usually shorter than bull markets, and despite the pullbacks, the stock market has returned an average of 9.9 percent a year, including dividends, from 1900 through 2015, and returned 30.6 percent last year.
So, when are we due for a bear market? Now. The last one began nearly ten years ago, more than twice the post 1900 average duration between bear markets. The last real correction was in 2011.
What should you do? My advice - timing the bottom of a correction or bear market is next to impossible. So invest now.
Bottom line: Develop a plan to eliminate your impulse to time the market. Next week we will go over my strategy where you trade just one day a year. And on that one day you will meet or beat the market.
3. Paying too much in fees. If you have a broker, who do you think they work for? Are they your advocate in all things? Unfortunately, many times the brokers loyalty is to their firm not to you. I used to sell stocks and bonds on Wall Street. Many times we had a meeting to “pitch” our stock to the brokers of an investment house before the market opened. When the meeting was over I would stay for a few minutes to listen to what the firm was encouraging their brokers to “pitch” to their clients. Not based on the fundamental merits of the investment, but based on the fact that that firm had too much inventory in that stock. It was an eye-opening and disappointing experience for me. The result – I fired my broker and managed my own account for the last 25 years.
You can do all the right things. But if you are investing like most people are, you don’t even know all the fees you're paying. You don't just compound your money over time, you compound your
fees. If you're paying more than 1 percent, you're overpaying, Many exchange-traded funds have expense ratios of less than .50 percent. Some index funds have expense ratios below .10 percent.
In two weeks we are going to talk about index funds. I am a long- time advocate of passive investing in low-fee index funds. My preference, as always: a low-cost S&P 500 index fund.
Bottom line: Ask your broker to show you what you are paying in fees. If you have an IRA, ask the plan administrator to tell you what the total fees are. If the answer is more than 1% you need to make some changes.
4. Not diversifying. "You need to diversify across asset classes and within asset classes and across economies and time.
What do I mean by that? Have you ever heard the saying that you shouldn’t put all your eggs in one basket? The problem, of course, is if that basket falls, all your eggs will go with it. Well, the same advice applies to investing—except replace the eggs with your hard-earned dollars.
Let’s say your friend recommend a “no fail” tech start-up. If you invested all of your money in that tech stock and the company went bust, for example, all of your money could go with it. I have done this on more that one occasion. Fortunately, I have a rule with myself that put no more than 10% of my portfolio into any one investment. Even with that rule, I have invested in several companies that I have passionately believed in their success – only to have my hard earned dollars vanish as the company fails.
Even if you spread your money across several companies in any one sector – like tech, energy, consumer products, retail, entertainment, health care, financial services and the like, your portfolio could get dragged down if that sector sinks.
But invest your money in a range of sectors as well as in companies located in different countries your portfolio may be safer. Even if one industry—or one country’s economy—fails, you still have other investments to keep you afloat.
That means investing, for example, in stocks and bonds and real estate—and in small, large, domestic and foreign companies, and corporate and government bonds with different payout dates. That way, even if one sector—or asset class—loses value, you still have other investments to keep you afloat.
Bottom line: spreading your money across a mix of investments can lower the risk of your portfolio being dragged down when one company, sector or country is struggling.
In closing this week - the biggest mistake of all is not getting into the game. You wait, wondering when it’s the right time to get into the market and eventually It’s never the right time. But the reality is that it’s always the right time. You just have to get in.
As a disclaimer – I am not an investment advisor and am not providing investment advice. I am merely giving you the benefit of my personal experience in investing.
Until next week
November 8, 2017
Join me every Wednesday on my podcast “Unlocking the Secret to Living Rich”.
If you have questions or comments you can contact me at my email firstname.lastname@example.org or find me on Facebook, Twitter or Instagram @cindybbrown777
Who is Cindy B. Brown? Cindy is a CPA, MBA, CFO, board member of public and private companies, business consultant, entrepreneur coach and a foremost expert in the field of financial
mastery. Cindy’s purpose is to motivate, educate and inspire people to live their richest life. Host “Unlocking the Secret to Living Rich”.