Posted by Robert on June 4, 2012
One obstacle that seems fairly common in investing is the fear of making mistakes. This is entirely understandable. All through school, we’ve been taught not to make mistakes. Now that money is in play, we certainly don’t want to make a mistake. Unfortunately, the fear of making mistakes can be paralyzing and can keep people from investing at all.
I spent the last four months training for a sprint class triathlon, the Vulcan Tinman. I practised swimming, biking and running, I built endurance and I increased my speed and strength. I read all the advice I could find. I practised my transitions and I prepared all my gear. Finally, on June 2, I was ready to race. We travelled down to Vulcan, AB, registered, got my timing chip, completed my bike check and racked my bike. I had felt that rush of adrenaline that comes from being nervous, but by the time I got to the pool, I felt calm.
At the pool, I found out they were running about 30 minutes behind schedule, which gave me time to watch the racers who were in the prior heats. The event is family-friendly and not meant to be competitive, so there were participants of a variety of abilities. Watching people in the pool was fun, because some were strong and quick, while others were thrashing and splashing or just struggling. One man in particular stood out. He started off swimming fast, but looked like he was expending quite a bit of energy. The guy next to me commented that he needed to pace himself, and sure enough, he was moving much slower through the last half of his swim.
Not too much later, I got to the front of the line. I was ready to go and could hardly wait my turn. In my excitement, I even made a false start. When it was finally my turn, I ran to my lane and jumped in the pool. Despite training at a relaxed and even pace and despite criticizing another racer for starting too strong, I made the same novice mistake. I pushed off swimming hard, and after about a dozen lengths I had to stop to catch my breath a couple times before finishing my swim. I refocused as I transitioned to the bike, I rode well and finished the run. Despite starting with a mistake, I completed my first triathlon with a time I was proud of.
When investing, there are choices that people make in order to avoid mistakes. The first is to put their money in a savings account or in GICs. Earning interest is a guaranteed way not to lose money, but the interest rate is often close to inflation, so after paying taxes on interest income, the investor is left with less purchasing power each year. Another way to avoid making mistakes is to buy index funds. Earning the average market return, less expenses and trading costs, guarantees that you’ll never earn far less than the market average. Some investors choose to work with an advisor, so that if mistakes are made, at least they’ll have someone to blame (or fire).
If you’re the type of person who enjoys investing and believes that it’s a worthwhile ability to develop, then you’ve got to make mistakes. Learning the theory is a good foundation, but true understanding comes from experience. Making mistakes is inevitable, so it seems wise to make your mistakes early, with small amounts of money. Then, when you’ve accumulated more capital, you can invest with confidence and avoid the most obvious mistakes.
What investment mistakes have you learned from? What do you wish you had known when you started investing?