2812: One Big Expensive Investing Mistake to Avoid by Jay Delaworth on Building Wealth

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[00:00:59] [SPEAKER_00]: This is Optimal Finance Daily. One Big Expensive Investing Mistake to Avoid.

[00:01:05] [SPEAKER_00]: By Jay Delawirth with MoneyMiniblog.com

[00:01:09] [SPEAKER_00]: And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:13] [SPEAKER_00]: Now let's get right to it as we optimize your life.

[00:01:20] [SPEAKER_00]: One Big Expensive Investing Mistake to Avoid.

[00:01:24] [SPEAKER_00]: By Jay Delawirth with MoneyMiniblog.com

[00:01:28] [SPEAKER_00]: These days you can get started investing online with only a couple of dollars.

[00:01:33] [SPEAKER_00]: And the whole process of creating and funding a brokerage account can usually be done from your couch,

[00:01:39] [SPEAKER_00]: even if you only have a few minutes to spare.

[00:01:41] [SPEAKER_00]: So at the end of the day, it's fair to say we're extremely lucky to live in this era of unparalleled and ever increasing financial access.

[00:01:51] [SPEAKER_00]: But unfortunately, especially for newer investors,

[00:01:55] [SPEAKER_00]: investing itself isn't quite as easy as opening your account.

[00:01:58] [SPEAKER_00]: In fact, it turns out there are a myriad of different ways to lose your money in financial markets.

[00:02:04] [SPEAKER_00]: And unfortunately, common sense doesn't preclude us from many of the common investing errors.

[00:02:11] [SPEAKER_00]: Some of the more popular mistakes you might be wary of include...

[00:02:15] [SPEAKER_00]: Number one, don't buy stocks on a tip.

[00:02:20] [SPEAKER_00]: Just because your friend, colleague, or favorite uncle is making an investment, doesn't mean it's a good one.

[00:02:26] [SPEAKER_00]: If you habitually buy companies based on a hot tip, you're basically gambling with your hard-earned savings.

[00:02:32] [SPEAKER_00]: Stop it!

[00:02:34] [SPEAKER_00]: Number two, buying too much of one investment.

[00:02:38] [SPEAKER_00]: This is another risky proposition.

[00:02:41] [SPEAKER_00]: And not only is it financially perilous,

[00:02:43] [SPEAKER_00]: it can also be immensely stressful to put all of your eggs in one basket.

[00:02:48] [SPEAKER_00]: You might even find yourself tossing and turning at night, afraid of what you might wake up to.

[00:02:54] [SPEAKER_00]: And number three, trading too frequently.

[00:02:58] [SPEAKER_00]: Even though trading stocks online is easy, and some would argue fun, don't get carried away.

[00:03:04] [SPEAKER_00]: Because each time you place a trade, you open yourself up to a potential mistake.

[00:03:09] [SPEAKER_00]: Plus, if you aren't careful, you'll find the commissions can really add up to take a bite out of your bottom line.

[00:03:16] [SPEAKER_00]: Now, while you should certainly pay attention to these common investing errors, and as insidious as they can be,

[00:03:23] [SPEAKER_00]: there's one much larger mistake you'll definitely want to be aware of.

[00:03:28] [SPEAKER_00]: So what is this big and expensive investing mistake to avoid?

[00:03:32] [SPEAKER_00]: Let me show you.

[00:03:34] [SPEAKER_00]: Why not having an exit strategy will cost you.

[00:03:38] [SPEAKER_00]: Most investors start out with the very best of intentions.

[00:03:42] [SPEAKER_00]: They want to put their money to work with the hopes of saving for a down payment on a house,

[00:03:46] [SPEAKER_00]: putting their kids through college, or simply having enough leftover to enjoy their golden years.

[00:03:52] [SPEAKER_00]: But one thing many self-directed investors seem to continually gloss over is how and when to sell the securities in their portfolios.

[00:04:01] [SPEAKER_00]: And it doesn't matter what your timeframe is, or what kind of assets you buy.

[00:04:05] [SPEAKER_00]: In every case, you should be able to articulate why you'll sell before you ever buy.

[00:04:11] [SPEAKER_00]: Because chances are, at some point, you're going to want that money.

[00:04:15] [SPEAKER_00]: So you had better have some rules around when you can access it.

[00:04:19] [SPEAKER_00]: The reason this is so important is because without a logical and well-thought-out exit strategy,

[00:04:26] [SPEAKER_00]: you open yourself up to huge risk.

[00:04:29] [SPEAKER_00]: You're more likely to sell at the worst possible moment,

[00:04:32] [SPEAKER_00]: which can cripple your financial future and seriously set back any ambitious plans you might have had.

[00:04:38] [SPEAKER_00]: And even if you do stay the course, you might find the journey much more stressful when you're perpetually second-guessing yourself.

[00:04:46] [SPEAKER_00]: So if you're curious about how to come up with an exit strategy, keep listening.

[00:04:52] [SPEAKER_00]: How do you decide when to sell your investments?

[00:04:56] [SPEAKER_00]: Unfortunately, I think deciding when to sell is the absolute hardest part of investing.

[00:05:01] [SPEAKER_00]: On one hand, if you have a losing stock pick, ETF, or mutual fund in your account,

[00:05:07] [SPEAKER_00]: you're probably worried about how much lower it can go.

[00:05:10] [SPEAKER_00]: So will you cut your losses or stay the course?

[00:05:13] [SPEAKER_00]: And what if it rebounds higher after you sell?

[00:05:16] [SPEAKER_00]: On the other hand, deciding when to sell winning investment ideas is also a difficult decision.

[00:05:22] [SPEAKER_00]: Do you take your profit or leave some money on the table with the hope that your good fortunes will continue?

[00:05:28] [SPEAKER_00]: What if it keeps going up after you sell?

[00:05:31] [SPEAKER_00]: These aren't easy questions.

[00:05:33] [SPEAKER_00]: And the answers are very likely to depend on your personal investing philosophy, risk tolerance, and timeframe.

[00:05:40] [SPEAKER_00]: But at least by starting to be aware of these factors, you can begin to reflect on your specific selling options.

[00:05:48] [SPEAKER_00]: So I strongly encourage you to think about the circumstances under which you'd sell.

[00:05:54] [SPEAKER_00]: This is especially true if you're buying and selling individual stocks.

[00:05:59] [SPEAKER_00]: In my experience, the biggest losses come from betting on a specific stock or company and riding it all the way to zero.

[00:06:07] [SPEAKER_00]: So if you're a fundamental investor, think about what data would need to change for your thesis to be proven wrong.

[00:06:15] [SPEAKER_00]: And if you're a shorter term trader using technical analysis, decide where to put your stop loss ahead of time.

[00:06:23] [SPEAKER_00]: Here's another example.

[00:06:25] [SPEAKER_00]: If you're a buy and hold investor building a diversified portfolio for retirement,

[00:06:29] [SPEAKER_00]: be very clear how much you need to accumulate before you'll start selling down.

[00:06:34] [SPEAKER_00]: And remember, this dollar amount can change in the case of a market drawdown.

[00:06:39] [SPEAKER_00]: Thus, you may need to adjust accordingly on the fly.

[00:06:43] [SPEAKER_00]: Plus, think about what other external circumstances could compel you to sell.

[00:06:48] [SPEAKER_00]: What sort of family emergencies or unforeseen events would cause you to cash out your investments?

[00:06:54] [SPEAKER_00]: Or what rate of return would you need to see from a hot real estate deal to liquidate your stocks and move to an alternative asset?

[00:07:03] [SPEAKER_00]: By laying out these rules ahead of time, you should be less likely to make an expensive emotional mistake and sell at the wrong time.

[00:07:11] [SPEAKER_00]: As for me, in my case, as a trend following investor, I've written out a detailed plan for where to place my stop loss order and how to adjust it over time.

[00:07:22] [SPEAKER_00]: Then, in my longer-term retirement accounts, I'm happy to continually dollar cost into diversified low-cost funds, rebalancing periodically to get back to my target allocations so long as my businesses are generating cash.

[00:07:40] [SPEAKER_00]: Now, the key is to just stick with these good intentions.

[00:07:44] [SPEAKER_00]: Conclusion. The right time to sell is up to you.

[00:07:48] [SPEAKER_00]: As you can see, there are a variety of factors that go into deciding when you should sell your investments.

[00:07:54] [SPEAKER_00]: So I encourage you to take some time to reflect on your personal situation and what exit strategies will work best for you.

[00:08:01] [SPEAKER_00]: But whatever you do, just make sure you have a plan for when you'll sell.

[00:08:06] [SPEAKER_00]: And do it before you push that buy button.

[00:08:08] [SPEAKER_00]: It's the only way to consistently avoid the biggest investing mistake out there.

[00:08:17] [SPEAKER_00]: You just listened to the post titled, One Big Expensive Investing Mistake to Avoid by Jay Delaworth with MoneyMoneyBlog.com.

[00:08:26] [SPEAKER_00]: And I'll be right back with my commentary.

[00:08:29] [SPEAKER_00]: I often hear a lot of confusion about what to actually buy when you're investing.

[00:08:34] [SPEAKER_00]: And this article highlights some considerations for stock picking if you're an active investor.

[00:08:39] [SPEAKER_00]: If you've been listening for a while, you know that I'm a huge fan of passive investing in low fee total market index funds.

[00:08:47] [SPEAKER_00]: And if you're interested in learning more about this style of investing, I recommend you read The Simple Path to Wealth by JL Collins.

[00:08:55] [SPEAKER_00]: Because that book is what helped me figure it out.

[00:08:59] [SPEAKER_00]: While it's true that active investors are more likely to beat the market in the short term,

[00:09:05] [SPEAKER_00]: almost no one beats the market over the long term, unless you're Warren Buffett.

[00:09:10] [SPEAKER_00]: That's a big reason why I'm such a fan of passive investing.

[00:09:14] [SPEAKER_00]: I just don't see the need to work harder when the results likely won't be better.

[00:09:19] [SPEAKER_00]: And because I'm investing for the long term, I simply don't need to beat the market.

[00:09:24] [SPEAKER_00]: I'm happy with matching the market to meet my financial goals.

[00:09:28] [SPEAKER_00]: When it comes to an exit strategy, I do agree with the advice here that you should have a financial target in mind for retirement.

[00:09:35] [SPEAKER_00]: Once you reach this goal, your strategy in terms of asset allocation can shift from accumulation to preservation.

[00:09:44] [SPEAKER_00]: As my friend Frank Vasquez says over on the Risk Parity Radio podcast,

[00:09:50] [SPEAKER_00]: once you win the money game, there's little benefit to keep playing.

[00:09:54] [SPEAKER_00]: But that should do it for today.

[00:09:56] [SPEAKER_00]: Have a happy rest of your day.

[00:09:58] [SPEAKER_00]: And I'll see you on the Tuesday show tomorrow, where your optimal life awaits.

[00:10:02] [SPEAKER_00]: And I'll see you on the next one.

[00:10:03] Thanks.