We are all human and err from time to time. The key is to learn from the experience and not make the same mistake again. I will discuss my biggest investing mistake and what I have learned from it.
We have all seen the investing advice: buying this stock will make you rich, and this stock will set you up with a long term dividend income stream. When I started investing, I listened to this advice….and I paid for it, literally!
The stock: Fannie Mae.
I was interested in Dividend Stocks and read a lot of articles about how they have good returns and can make you wealthy with market beating returns. I read a lot of articles recommending Fannie Mae and took the bait and bought the stock. I didn’t understand the business, but figured the “experts” writing about it did, and I wrongly listened to them.
After I bought it the price went up and I enjoyed the dividends….for a short time. The stock came crashing down quickly during late 2007 and 2008. August 2008 was the last dividend ever paid….The stock price reached less than $1 in October 2008. Ouch!
The interesting thing about the internet is that you can still find articles suggesting to buy FNMA from this time. Here is an example:
- 4 Stocks That Took a Hike. Companies with growing yields can make you rich in more ways than the obvious.
- Fannie Files! Filing of 2005 annual report is critical step in getting back on track.
My Personal Learnings from this experience:
- Don’t listen to “experts” advice, without vetting it yourself. Trust but verify!
- If you don’t understand the business or the investment, then don’t buy it.
- It is tough to beat the market with individual stocks. As an individual investor, I don’t have the time or tools needed to match the market, let alone beat it.
- Index funds with a collection of stocks are more efficient when you small amounts to invest. You can get a collection of 500 stocks with a relatively small purchase.
- When you buy individual stocks and a company struggles, it has a bigger impact on your portfolio than when a company is one of 500 in an index.
- Just because a company has an increasing stock price and dividend today, doesn’t mean it will in the future.
I have reflected on my biggest investment mistake, and have since focused on Index Mutual Funds and ETFs. I will never say never to purchasing individual stocks, but one incident like I had is enough to create pause.
There are a lot of people who give their stock picks. Before following them like sheep, think about it. Yes, there are legit picks…but some of the picks are made to just create a buzz or to fill a requirement to create a post.
In closing, be careful with the investment advice you read. Maybe the recommendation is a really good company….or maybe it is the next Fannie Mae!