Rough Transcription – Video Length – 6:13
“Oh, that’s what investing is.” This was my reaction after it finally hit me. I was looking for the magic bullet. Trying to pick stocks, trying to time the market, and forgetting about taxes and expenses.
Then I had sort of this realization. All investing was, was dollar cost averaging into a low-cost Target Retirement Fund in a Roth IRA month, after month, after month.
Soon I learned that many others my age were making these same mistakes. Lucky for us, we were young and it wasn’t costing us a fortune. However, if we continued on this path, it would cost us millions.
This post explains the five biggest mistakes that investors make, so you don’t have to have to waste your time or money.
Avoiding Simplicity
100% of my Roth IRA is in a 2050 Target Retirement Fund. Are there better options? Of course there are. I just don’t know what they are as of now. This simple approach (indexing) has proven to be among the top 20% year in and year out. That’s fine with me.
Thinking Short-Term
When the economy is down and my portfolio was down 40% over a year ago, the short-term solution would have been to cut my losses and get in a more conservative investment approach, such as a money market fund. This is what everyone else did. However, by doing so I would have missed the 70% upswing from the market low. It’s hard to think long-term but it’s required to be a successful investor.
Waiting for the Perfect Time
The only good reason for waiting to invest, is you’re waiting to pay off your debt. The barrier to entry for investing is low. You can start investing in a Roth IRA, in a good mutual fund for as little as $50 a month. Don’t wait till your income goes up or the next 401K meeting, start today.
Wanting It All
If you want income, such as interest and dividends, you can’t have growth. If you want growth, you can’t choose a risk free investment. In other words, you can’t have your cake and eat it too.
Forgetting About Costs
Lets starts with taxes, potentially the biggest cost for most investors. If you saved $5,000 a year in a Roth IRA for 40 years and earned 10% per year, you would accumulate $2,434,259 (Roth IRA Calculator). If you saved that amount in a taxable account, you would only have $1,221,504. Next, let’s talk about expenses. If you saved $5,000 a year for forty years and only earned 9% because of expenses, you would have only $1,841,459. A difference of $592,000 if you earned 10% per year.
Closing
When I was starting out, I didn’t know what investing really was. For some reason, I thought it was picking stocks and timing the market. While avoiding the important stuff like taxes and expenses.
Turns out I was gambling, not investing.
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