It’s a common goal.

At least in the US. Save enough and retire, the sooner the better.

My goal is similar, with a twist.

I don’t look forward to retiring in the classic sense of never working again. My goal is to reach financial independence, so I can choose when to work, on what, and how much, with no regard to what it pays.

It’s not that I don’t enjoy my consulting work. I very much do. I get to work with brilliant, motivated, friendly, professional people on cool and important stuff.

However, what I’m looking forward to is the sense of total freedom that comes from knowing that your lifestyle doesn’t depend on whether you work today, or ever, for pay.

Reaching this goal, given that I started from a negative net worth when I graduated with my PhD at age 30, wasn’t predictable, let alone easy. It required learning how to invest, and then investing as early, as often, and as much as I could, while also covering our day to day expenses and enough fun stuff to make life a joy rather than a constant grind.

An old adage says, “The wise man learns from others’ experience.”

Here’s what I learned from others’ experience (wise), and my own (less so), about several wrong ways to go about investing. From others by reading, from my own experience through messing up and losing money. If you engage in any of these, more than likely it’s costing you money each time.

Trying to Time the Market

Possibly the greatest investor of all time, Warren Buffet credits Graham’s teachings for his incredible success. Among other things, Buffet quoted Ben Graham as having said, “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

Since it’s impossible to know everything about an investment (short of illegal insider trading), timing the market requires you to guess correctly the market’s lows (to buy in), and its highs (to sell).

According to a Business Insider article, Fidelity Investments conducted a study to find out what their investors with the best investing results had in common. The result, according to BI, was that they were the ones who had forgotten they had a Fidelity account!

What does forgetting you have an account mean? It means you stop trading. This means that just holding for the long haul resulted in better outcomes than trying to optimize your results by timing the market.

Trying to Beat the Market

Many claim (with some basis, according to research) that beating the market over the long term is impossible. I disagree. In my opinion, backed with data from many of the funds I invest in, it's not impossible, merely difficult.

Either way, what matters is how you invest to get the best long-term results. If you bet the farm on high-risk strategies, you may get very lucky and go from a few thousand dollars to a few million. However, doing that makes you a speculator (= gambler) rather than an investor, and you’re far more likely to lose it all.

Investing is about achieving your personal financial goals, not beating the market. Would you rather get great returns but fail to achieve your goals (e.g., because you invested too little, too late), or achieve your goals with mediocre returns (because you invested early, often, and consistently)?

In short, if you consistently follow a plausible system for picking good solid investments, you should do well over the long haul. If you keep taking high-risk bets in the hope of knocking it out of the park, you’re setting yourself up for big losses.

Trying to Beat the Pros

When I sold my first home and bought my next one, I ended up with a nice chunk of change beyond what I needed for the new purchase. I decided to split it between my 403(b) retirement plan and a taxable account with TD Ameritrade.

The money in the latter I split five ways between stocks I thought would do well. One of those was Bank of America, which at the time paid a very high dividend. For a while, the stock climbed slowly. Then, it started falling, and continued falling until it was worth pennies on the dollar.

My other picks did better, some doing quite well. But overall, the S&P 500 left me behind, as did my mutual fund investments.

The lesson I learned from that was that I don’t have the expertise and experience to beat the pros, nor the time to gain such expertise and experience, nor the analyst support they all enjoy. Do you?

Taking on Too Much Risk

Related to Trying to Beat the Market above. The predictable result of investing too little too late is a less-comfortable retirement. When that happens, some people may be tempted to take on higher risk in the hope of getting outsize returns and changing their outcome.

“Higher risk” is called that for a reason.

It means that, over time, you are more likely to lose more of your money.

Taking on Too Little Risk

The flip side of the above is taking on too little risk.

Over the long term, bonds have returned an inflation-adjusted 2.5%/year, while savings accounts are lucky to keep purchasing power intact, and in recent years have actually had a negative return of about 1.9%/year. If you think stocks are too risky, and instead invest only in bonds or keep your money in savings accounts, here’s how this works out.

As you can see in the table, saving for retirement using savings accounts requires (at best) saving $2083/month (!) and the entire $1 million we’ve assumed as the target (which is probably not enough anyway).

Using bonds is better, with $1236/month needed, for a 40-year total of $593,449. This means that while you need to set aside about 41% less than with savings accounts, you still need to set aside more than half of the dollars you plan to start your retirement with.

By comparison, using stocks (or stock funds) requires $474/month or $227,749 in total. Here, you only need to set aside about 23% of the dollars you want to end up with, letting the market bring in the remaining 77%!

Staying in an Investment Too Long, Trying to Break Even

Holding on to a losing investment until you break even can burn you badly. Some stocks never come back. Buy and hold can work out well for some stocks, but for others, you're just throwing good money after bad.

Even companies that don’t go bust may take a very long time to recover their stock price (if they ever do). That’s why you should consider whether there are other investments that offer better prospects than the ones you’re holding that have dropped.

Of course, running for the exits after you lost a big chunk of your investment and buying a new market darling is a “great” way to sell low and buy high – not the optimal investing strategy. This is why you have to craft your investment system when you’re not stressed by losses, and then stick with it through the inevitable market gyrations.

Staying in an Investment Due to the Time and Effort You Put into Picking It

Doing due diligence when choosing investments is crucial. But there are no extra points for effort in investing. How hard you worked on your analysis matters far less than how good a job you did.

If you picked an investment due to fundamentals (or technical analysis), and market, industry, or specific investment conditions have changed, be ready to pivot and move your funds to what is now a better investment.

A great way of expressing it is that investing requires you to have strong opinions, weakly held. Strong enough to act on, but weakly enough held that you don’t hesitate to act appropriately on new information.

The Bottom Line

My experience with investing has taught me many lessons, including some painful ones. The above are 7 little investing mistakes that could be costing you money time after time. Be wise, and learn from my experience, avoiding having to pay with your own money to benefit from them.

Disclaimer

This article is intended for informational purposes only, and should not be considered financial or legal advice. You should consult a relevant professional before making any major decisions.