Not all investment mistakes are created equal.
Some are annoying. Some are self-inflicted. Some are painful. And some you can’t come back from.
Here’s a look at Ben’s hierarchy of investment mistakes:
Annoying mistakes. These are the investment mistakes that can cause regret but don’t necessarily wreck your plan.
Annoying investment mistakes include things like:
- Selling a winning position too early.
- Holding onto a loser for too long.
- Not rebalancing your portfolio.
- Investing in an underperforming fund.
For example, let’s say you invested in a large cap actively managed fund that underperformed the S&P 500 by 1.5% per year for the past 5 years. In that time the S&P 500 is up 16% per year so that would mean you earned 14.5% annually.
It’s annoying that you underperformed but it’s not the end of the world. At least you stayed invested. It would have been far worse if you weren’t in the stock market at all.
Self-inflicted mistakes. Most investment mistakes are self-inflicted but some errors are more glaring than others — paying egregiously high fees, trying to copycat billionaire investors, over-trading, not doing your due diligence on an investment, confusing your time horizon with someone else’s, assuming you’re smarter than the market, etc.
Investing is hard. Ironically, once you come to this realization you can make it a little easier for yourself by avoiding the biggest self-inflicted blunders.
Painful mistakes. These mistakes will cost you some coin, cause serious regret and leave lasting scars. Timing the markets is the big one here.
Making a terrible mistake at the worst possible moment such as selling out of your stocks after they have already gone down a healthy amount or missing out on a raging bull market by sitting on the sidelines.
You can survive painful mistakes but they can also cause lasting damage.
Endgame mistakes. The annoying, self-inflicted and painful mistakes are no fun but you can come back from them. It might take some time and patience but it’s possible.
Every investor makes mistakes. The important thing is you learn from them and don’t repeat those same mistakes going forward.
However, there are also endgame mistakes that are more or less impossible to come back from — fraud, scams, Ponzi schemes, losing all of your money, etc.
Jason Zweig of The Wall Street Journal uncovered a tragic story where investors put their entire retirement savings into a yield strategy that turned out to be a scam:
Through a friend, he heard about a firm called Yield Wealth and the “guaranteed” 15.25% return it was offering to investors on some products.
“I figured this is an amazing opportunity and I’ll be set for life,” recalls Whitacre, 60. He talked about it so obsessively, says his wife, Kimberly, that despite her misgivings she eventually told him, “It’s your money, I have no clue, I don’t care anymore, do what you gotta do.”
In March, Whitacre withdrew his entire 401(k) from Fidelity–$763,094.21–and rolled it over into an individual retirement account with Yield, which was affiliated with a firm called Next Level Holdings.
That doesn’t sound good. Then this happened:
In early November, Next Level failed to send out monthly distributions to investors. Then, on Nov. 15, Next Level sent clients a notice that the firm would be “liquidating investments and winding up its affairs.”
Whitacre and other clients were given no indication of when, or if, they would be cashed out, or how much they could expect to receive.
Investors received pennies on the dollar. Many of them cashed out money from IRAs and will be forced to pay taxes as well. This is the nightmare scenario.
These quotes from the story were the biggest red flags:
“We all believed it was magic, the unicorn we’ve been looking for,” one insurance agent who sold Next Level tells me.
With the promise of such high income and a guarantee against loss, says Graham, “it sounded like a perfect solution.”
If it sounds too good it most likely is. There are no guarantees or perfect solutions when it comes to investing.
I can’t even imagine how these people feel but this investor summed it up:
Now that Graham has no idea when–or if–he will get his money back, “you can imagine how it feels to have all your savings wiped out,” he says. “It makes me sick. It makes me depressed. It makes me very angry. It makes me feel stupid.”
Financial scams are ever present because there will always be charlatans. But I become even more concerned right after a bear market when people are hurt or during a raging bull market when investors throw caution to the wind.
The victims of this scam were duped by the promise of high yields and a guarantee against loss because they lost money in the bear market of 2022.
Now we’re in a bull market where investors will reach for more and more gains.
Be careful out there.
Michael and I discussed financial scams and more on this week’s Animal Spirits video:
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Further Reading:
One of the Biggest Mistakes in Investing
Now here’s what I’ve been reading lately:
- America’s productivity boom (Apricitas Economics)
- Why is economic growth so good right now? (Stay at Home Macro)
- The small Michigan city that builds NBA courts (The Athletic)
- How to avoid investment Fruit Loops (A Teachable Moment)
- The long walk (Seth’s Blog)
- Advisors Face an $80 Trillion Tidal Wave as 10,000 Clients Retire Every Day (The Unlock)
- The 50 best movies to watch on an airplane (The Ringer)
Books:
