In 2017, my net worth increased by $195K, the year before that, my net worth increased by $322K. For the last two years, I made myself half a million dollars richer. When you read these two sentences, you must be thinking that increasing my net worth was relatively easy. Furthermore, my journey to build a net worth of $2M had always been very rosy and uplifting.
In reality, my my million dollar journey experienced quite a few ups and downs along the way. What you’ve read for the past year and a half on my blog just happened to be the uptrend of my journey. Since I’ve been sharing mostly the positive side of my journey because of the stock market uptrend, I thought that it would only be fair and educational to share the not so positive side of my journey too.
DIY Investment Lessons Are Learned Through Mistakes
In my opinion, I believe that it’ll be more valuable and you’ll learn a lot more if I share the DIY investment lessons that I experience through the negative parts of my financial journey. During the last decade of my DIY investment journey, I experienced a total of three down years where I lost money in the stock market. In those three down years, I lost a combined $263,164.23.
To some, that’s a boatload of money and it is. My hope is that by sharing my experience, my readers will benefit and learn from my mistakes and avoid making the same investment mistakes themselves. As I have been preaching, “it’s a lot cheaper to learn from someone else’s mistakes than to experience the mistakes yourself.” So without further ado, let’s take a look at what I had screwed up during the last ten years of DIY investing and what you can learn from my mistakes.
Following The Investment Advice Of Talking Heads On TV
When I first started investing, I couldn’t change the TV channel on my TV. Somehow, any TV that I turned on in my house ended up tuning to the Business News Network. I was obsessed with business news and updates. Every day, I would be hearing something different and some of the opinions/predictions were outrageous now that I thought about it.
When the price of gold was about $2,000 an ounce, some gold bug portfolio managers predicted that gold will rise to $5,000 an ounce. When crude oil price was $147/barrel, some resource portfolio managers predicted that it’ll rise over $200/barrel. When crude oil price was $35/barrel, some resource portfolio managers predicted that it’ll drop to $10/barrel. Does this sound familiar?
Admittedly, I made the mistake of buying into some of the stories presented by these talking heads and purchased some of their recommended stocks. As a result, my portfolio got pummelled when the oil downturn started in late 2014. That was how my investments lost almost $100K in 2015. Just keep in mind, the so called investment experts on TV always have a personal agenda. Take everything they said and presented with a grain of salt.
Not Diversifying My Investment Properly
One of my investment mistakes was not diversifying my investment enough. As a Canadian, I bought mostly Canadian stocks because I was seduced by the dividend tax credit when I receive dividend payments from Canadian eligible companies. In addition, the management fees for International stock ETF are higher comparing to Canadian stocks ETF. For U.S. stocks, you get hit with the 15% withholding tax if you received dividends from U.S. companies in your non-registered account.
All those factors contributed to my investment portfolio being heavily concentrated in Canada. I have very little exposure to U.S. stocks and almost no international market exposure. When the U.S. market was on fire last year (gaining 20%) and the international market didn’t perform that bad either, my investments underperformed big time.
The lesson here is to make sure that your investments are properly diversified. Spread your ownership to different regions and across different industries. These ways, you can achieve balance and when one region or industry is not performing well, you have others to pick up the slack.
Not Knowing When To Sell
Let’s face it when any of your investments are losing money, you’d hate to sell and lock in the losses. I hate doing that too. Unfortunately, sometimes, the decision not to sell when the stock keeps on falling, cost me a lot of money. Over the last decade, I had owned five stocks that either went to zero or close to zero. I ended up losing most of my invested capital in those stocks because I did not know when to sell.
When I am talking about when to sell, I mean sell when the fundamental of a business changed not selling out of fear of the financial crisis back in 2008. One good example is Sears (I don’t own the stock), they definitely failed to adapt when their business environment changed. Hence their stock prices suffered. If you own Sears stocks, you have my sympathy.
Until now, I still have trouble deciding when to sell a stock when it’s dropping precipitously. This is still one of my investment weaknesses and I will have to do better on this front going forward. Hopefully, I don’t to make too many decisions on this front.
Doubling Down When The Stock Goes Down
From time to time, some of the price stocks that I own would go down. When that happens, it seems like the stock is on sale. So what do I do? I back up the truck and start doubling down on the stock thinking that I will be getting a great deal.
There are a few problems when you double down on a stock. The weighting of this stock or sector will increase, which means it’ll have more influence on your annual returns. You’re ignoring the reason why the stock is going down. You are also at risk of throwing good money after bad money.
On quite a few occasions, this had happened and I ended up losing more money. What I am doing now is to try to be more discipline and not to have the weighting of one stock or sector be more than a certain percentage of my portfolio. This way I will reduce the risk of a stock or sector dictating my portfolio return. I am also minimizing the risk of using good money to chase after bad money.
Concentrate More On Income Rather Than Growth
In recent years, I have been focusing more on investing in dividend-paying stocks and building a sizeable passive income stream. With this focus, I have become a bit more biased towards companies with higher dividend yields. As a result, I am sacrificing some higher growth stocks and direct more of my investment money to lower growth stocks.
The problem with concentrating on stocks that pays a higher yield (more than 4%), these stocks don’t often grow or increase their dividends. Even worse, some of these higher yielding stocks even cut their dividend. As a result, my goal of accumulating more dividends to increase my income backfired. Instead, I may even get fewer dividend payments going forward.
To ensure that my future income stream is stable and growing to at least be at par with the rate of inflation, I tweaked my dividend stock selection criteria. The stocks must have a good history of dividend payments, a good potential of future growth and of course, a track record of increasing dividend payments. Can’t avoid all the risks, but at least I know that the company that I purchase had an excellent dividend payment history.
|Year||My Return Amount||My Return %||Canadian Market Return||U.S. Market Return|
Note: Market returns do not include dividends
Last 10 Years Of Investment Returns
From the table above, the cumulated return from my ten years of investment, my money/savings earned a net amount of $272,348.99. Of the seven years that I made money, the total was $535,513.22. Once again, for the three years that I lost money, I lost a total of $263,164.23. As you can see, making money about 70% of the years that you invested, don’t always guarantee that the net earnings are about 70% of the total amount of money that you’ve made.
My Two Cents
Investing your money takes a lot of time and patience. There will be ups and there will be downs. The important thing to remember is every mistake is a learning experience. You will make mistakes along your financial journey and that’s okay. Every time that you make a mistake, just remind yourself that “failure is the road to success.”
So readers, how do you invest your money? Do you have fear of losing money so that you don’t take enough risk to grow your money? If you are a DIY investor, do you have any DIY investment lessons that you can share with us?