3 Investment Lessons to Keep in Mind While You’re on FIRE
For those of you on the FIRE path, the biggest hindrance to your goal can be none other than… yourself.
You can get the budgeting down, have the discipline to work hard, find the right job with the salary to fuel your ambition. Your investments may be diversified and growing.
You are the only one capable of creating the obstacles. Your emotions during turbulent times as well as flawed thinking can slow your progress.
You face it constantly, and there are bigger challenges up ahead. This article serves to remind you to be aware of potential mistakes you may make with your investments when situations get tense. Below are three stories I want to share, all from my experience. I’ve made the mistakes so that you don’t need to.
Do Not Time the Market (Please, don’t do it)
You’ve heard this many times. I will be the voice to repeat this lesson because no matter the multitude of times a person hears it, when the trial by fire begins, many just toss the lesson out the window and give in to their emotions.
The desire to beat the market is tempting. Human pride and ego proves too much for the rational mind.
“Maybe this time is different,” “I think I’m knowledgeable enough to beat the pros,” Those questions cross your mind and maybe once in a while, that will be enough to persuade you to do something irrational.
Every now and then, a healthy financial market will have a downturn. It’s normal and part of the economic cycle. When the market does take a nosedive, financial experts would say to not panic. They would also advise in most cases, remain invested in the market and try not to sell your investments in case you really have to.
Rewind to March of 2020. The Covid pandemic was continuing to spread and it was all over the news. The stock market was in panic mode and was having one of its most volatile moments in history. There were days the Dow Jones Index would go up and down thousands of points (which had never happened before until then). So much volatility existed, the stock market had to activate their circuit breakers multiple times in one single day. What are circuit breakers? They are mechanisms used to control volatility when markets go out of control.
So what I was thinking and doing while this was going on? I looked at my investments and prior to the Covid scare I was making a couple thousand of dollars in profit in some of my stock positions. Within days the market started to drop, the profits were shaved off and some of the stock positions I had were already losing money or near break even.
My thought process was; the pandemic was just beginning and with no vaccine in sight. This is just the beginning and it will continue to get worse in the economy. I should sell some positions as I anticipated the prices would continue to fall. The ultimate goal was to sell now and buy back the stock positions I sold at a much cheaper price. When the market rebounds, I would be raking in money. To myself, I sounded like a near genius.
I acted on my thoughts and I sold some stock for almost breakeven after holding them for a couple of months or year.
Given the power of hindsight, I had made one of the biggest mistakes any investor can pull off in the stock market.
As it turns out, the Covid recession was one of the shortest recessions ever in U.S. history. Starting in April of 2020, the stock market was starting to rebound.
I made a serious error in two ways. I sold my investments when the market was near or at the bottom (ouch). I failed to buy back the same investments as the market rebounded (even bigger ouch).
My mistake shows two things with market timing. In order to get market timing right, you need to know when to sell, and when to buy it back. Before you even think about how to time the market, I want to let you know that most people cannot time the market nor is it possible to consecutively get the timing right consistently. Professional investors and financial institutions can’t do it, so please do yourself a favor, don’t even try.
Do not be a Lemming
There will always be something that gets it’s time to shine. The next new and hot investment that everyone is going to pile into and enjoy the party as long as possible.
It’s up to you to decide whether the new hot investment will last, or just end up as another thing waiting to drop momentously. Be careful to not join in the crowd that are only attracted to easy money.
Before you invest, ask yourself why you are investing in it. Is the information that you’ve collected adequate to justify the risk and the position you are taking?
Take cryptocurrency, I am not going to discuss whether I’m for or against it here. But there are two groups of people that are in crypto. There is one group that perceives the value of crypto and the positive impacts it will have in our future. There is another group that got into crypto because it looks like a place to make quick and easy money. Which group are you in?
Back in 2010 and 2011, the shiny objects attracting people to pile their money in were precious metals, gold and silver. I was one of many investors who couldn’t help but to get pulled in. Silver climbed up to 40 something dollars a troy ounce and gold almost reached 2000 dollars. I had made some small gains buying and selling earlier in the year, so naturally, I wanted to go even bigger. I remembered buying maybe between $2000-$3000 worth of silver when it was near it’s all time high.
Guess what? The market had other plans and shortly after I bought my bags worth of silver ounces, the price of silver started to tank. I had hopes that silver would go back up, but those hopes proved fruitless. As of writing this article, silver is around the 23–25 dollar range. I actually sold most of my ounces of silver a couple months ago.
Know Your Risk Tolerance
Back in 2004, I started to buy US Treasury bonds. It was so exciting for me as before I only kept money in fishbowls, tin cans and cigar boxes. If I remember correctly, the most I bought in bonds was just under $1000 worth.
Knowing what I know now. I should have told my parents to open up a custodial brokerage or a Roth IRA account for me so I can invest my money into stocks instead. Bonds are great in the fact that you will get your money back plus interest, after a couple of years of course. The bad thing is that inflation may outpace bonds and if you wanted to retire early, bonds may not be the best answer. I sometimes think how much money that $1000 could have grown if I had invested in stocks that early in my lifetime.
To be fair, I won’t be too hard on myself on this one. What do kids know about investing anyways?
But when you are an adult, that is a different story.
Many of you may be parking your cash in savings accounts. It’s true you won’t lose your money, but maybe too much of your cash is not working for you? Or vice versa, you may be investing in something that is too risky and you run the risk of incurring significant losses that can delay your retirement.
To complete the story about buying bonds, if I remembered accurately, I think this ended with me cashing the bonds out to buy gold and silver in 2010 and 2011. If you read earlier in the article, you know how that turned out for me haha.
Conclusion
Unfortunately for you, the reader, these are not the only rules that you need to keep in mind. However, the three I mentioned are a good start. Investing does not have to be too complicated, you make it as complicated as you want.
Now I’m hoping that you won’t make the same mistakes. Realistically speaking, if you believe in what I wrote you may just make these mistakes less often. But you know what? If that turns out to be the case then that will still make me happy.
