When it comes to trading and investing, the sting of your early mistakes can be even more painful.
You don’t just suspect that you would have been happier had you refused that haircut or made that career change — you know that you’d be X dollars richer by now had you started earlier or done things differently. Ouch
If you’re reading this as a young trader or investor, you’re in luck.
Ten experienced money bloggers and finance professionals have taken the time to impart their hard-earned investment advice below. Whether you’re reading this at the age of 15 or 75, there’s sure to be something you can learn!
1. Stop aiming for short-term results
Before we get to the nine expert investors I asked for advice, I wanted to share my own thoughts – what investment advice would I give? What would I do if a time machine appeared and the one condition for using it was to spread investing knowledge? I’d probably tell my younger self to stop expecting short-term results.
When you’re new to investing, the thrill of making a quick buck is alluring. You learn about a new investing strategy and you immediately want to see the payoff. Big mistake!
Looking back on my younger years — in my late teens and through university — I always felt an overwhelming urge to see quick results.
I thought that, if a technique worked and I put some effort in, I deserved immediate rewards. I now realize that this an unrealistic and counterproductive attitude.
Because of my impatience, my view toward trading and investing and their time horizons was completely out of whack.
I overestimated what I could achieve in a short space of time, while underestimating what I could achieve over a longer period. I earned a reasonable salary at the time and should have focused on saving more.
However, when I aimed for short term results and I inevitably failed to achieve the dramatic results I expected, I became frustrated.
Once you adopt this mindset, it’s tricky to shake it. Even now, I look at others with a similar amount of experience to me and ask myself why I’m not doing as well as them.
With that in mind, I’d tell my younger self what I still tell myself now: don’t be in such a rush. Besides, where or what is the destination?
Making a few thousand dollars extra from a trade? Being wealthier than your friend or your next-door neighbor?
It might be a cliché, but life is a journey. Learn to enjoy the process!
You can achieve far, far more by putting in the consistent effort every day than by having the occasional huge win.
Instead of aiming for instant success, learn how to be consistent while developing an understanding of your emotions. Are you impulsive? Overly optimistic? Does fear guide you?
Knowing yourself allows you to predict when you’ll be taken off course. Be aware of your triggers and which feelings affect you.
2. Focus on passive income
Michael Dinich, the founder of Your Money Geek, has learned through experience that life and investment are tricky to predict. Contrary to conventional financial advice, he doesn’t recommend going all-out with investing from the earliest age possible.
When you are young, you are told to invest for growth, often taking on more risk than you should,”
Michael Dinich, Your Money Geek.
Given the benefits of compound interest (see #3), it might seem like a no-brainer to take advantage of potential returns. But most people don’t properly consider the risks of this strategy.
Michael would warn his younger self that life tends to toss us curveballs; recessions, layoffs, and COVID-19 are prime examples.
Instead of investing everything you have, it can be smarter to establish a passive income stream.
“The income becomes a renewable resource that you could use to dollar cost average into growth assets, as well as a safety net for when things go bad,”
Michael Dinich, Your Money Geek.
As Michael suggests, passive income gives us financial stability while also seconding as a sum we can invest if we don’t need to spend it. Sounds smart to me!
3. Take advantage of compound interest
Keith Park of DivHut is a mid-40s Internet entrepreneur with several dot coms of varying success under his belt.
Unlike Michael, Keith is a keen advocate of investing early to take advantage of compound interest.
As Keith says,
“You don’t really appreciate the power of compounding till much later in life.”
Keith Partk, DivHut
Indeed, if you’re familiar with the personal finance space, you’ve probably seen the charts that tell us how much richer we’d be had we started investing $100 a month aged 20 instead of 25. Keith said,
“Had I bought large, well known, boring companies twenty or thirty years ago and simply held on and reinvested my dividends, I’d be sitting on a nice passive income stream today,”
Keith Partk, DivHut
He went onto to give PG, KO, MO, PEP, CL, MCD, and KMB, as prime examples of stocks that have given a steady performance over the years.
Of course, that’s a lot of “ifs” — it might have seemed less-than-obvious to choose those company stocks at the time. The power of hindsight!
4. Consider risks carefully
We’ve already discussed the risks we can encounter in life and the importance of protecting ourselves against them. This is a sentiment that Brian Kehm, founder of Frugal Fortunes, echoes.
After achieving a double major in accounting and finance, Brian traveled the world, so it’s fair to say he knows a thing or two about taking risks! He’s also completed his CFA exams, giving him an impressive foundation in finance. As Brian points out,
“It’s easy to get caught up thinking about the upside potential, but focusing on both risk and reward is vital to becoming a better investor,”
Brian Kehm, Frugal Fortunes
Instead of being blinded by what you could gain from an investment opportunity, it’s prudent to also think about what we could lose. The key is finding more accurate ways to measure potential risk and reward.
Unfortunately, there’s no easy answer to how we can measure them, but the mindset shift alone is a huge leap.
5. Focus on your savings rate
Everyone knows we’re supposed to save money — but most people don’t view it as their top priority when formulating their investment strategy.
Joshua Holt, a private equity M&A lawyer who is the author behind Biglaw Investor, thinks this is a huge mistake.
The prospect of getting a high annual return might sound sexy or exciting, but it’s not the most important number for us to consider. Joshua advises,
“Whether you get an 8% or a 12% annual return on $1,000, you’re talking about the difference of $40 annually. Instead of worrying about your rate of return, if I could tell my younger self one piece of advice, it would be to put it all in a low-cost index fund and channel all of my energy toward increasing my savings rate,”
Joshua Holt, Biglaw Investor
When you’re just getting started, your savings rate has the most significant impact on your long-term wealth creation — lower earners are often able to save more than their higher-earning counterparts!
6. Stop caring about what others think
As I touched on in #1, you need to know the “why” behind your investment decisions. Instead of getting trapped into the game of trying to make as much money as possible, think about what you want to use that money for.
Are you thinking about you want, or trying to impress others on some level?
Bob Lai, the blogger behind Tawcan, realized that he wasn’t living life for himself a while ago. Now, he’s on a journey toward financial independence via dividend & ETF investing, with the ultimate goal of a more joyful life.
What would he say to his younger self?
“Stop caring about what others think about you. Figure out how you can find inner peace and be happy with yourself. Spend money on things that will make you happy, rather than creating a false image to try to impress people. Live below your means, save money, and invest money in low-cost index ETFs.”
Bob Lai, Tawcan
Financial responsibility and mental well-being? Sounds like a good plan to me!
7. Take a long-term perspective
Whether the focus is on your life goals or your investing techniques, there’s a common thread among the pieces of advice so far, and that’s to think about what you want in the long term.
One fund manager (who would prefer to remain anonymous) agrees:
“I would say that there are as many styles as there are traders. The better and calmer option is to build a seriously diversified portfolio and be long term.”
Instead of trying to find that magical investing technique that will earn you fantastic returns, it can pay dividends to just be sensible. Besides, being too much of a perfectionist can lead to unwise decisions when things go wrong.
There’s a proverb on Wall Street that encapsulates this sentiment perfectly:
“Do not try to catch a falling knife.”
Let the trend be your friend — sometimes, we have to embrace temporary losses to win in the long run.
8. Understand price action
If you were hoping to find some more technical advice about how to invest, get ready to start paying attention.
Shaul Lokia, a market analyst with over a decade of experience who runs a live trading room on The 5ers, advises prospective investors to pay attention to one particular metric when analyzing assets. As Shaul said,
“Focus on larger timeframes and reading price action. Drop every indicator and focus on price,”
Shaul Lokia, The 5ers
Yes, you heard that right — forget about all those fancy stats and quit trying to beat the market over the short run.
Shaul recommends starting with the smallest lot size, focusing on the process, and then honing in on making a profit when trading. Don’t try to jump in until you know the basics.
You can register for Shaul’s webinars in Spanish at investing.com
9. Accept you’ll often be wrong
Nobody can be right all the time, even if they’re Warren Buffet. Fortunately, being wrong is fine — as long as you’re right more often and when larger quantities of money are involved.
Attila Pál Tóth, an experienced portfolio manager and hedge fund analyst, has learned this all too well over his years working in financial markets.
Despite making an annual 16% return over the last two and a half years on a volatility strategy he’s developing, he wouldn’t necessarily advise his younger self to adopt such a bullish approach to investing.
Instead, he’d guide them toward the following quote from George Soros: “It’s not whether you’re right or wrong that’s important, it’s how much money you make when you’re right and how much you lose when you’re wrong.”
Does that mean that it’s okay to get it wrong sometimes, as long as we win big when we get it right? Perhaps — but Attila is clear to point out that we’ll be wrong most of the time, so it’s best to accept this and cut our losses.
10. Don’t try to over-optimize
Yes, we’ll be wrong a lot of the time — but Michael Melissinos of the global investment firm Melissinos Trading LLC which deploys capital in futures markets and equities takes a slightly more optimistic approach than Attila.
Michael points out that,
The odds are on your side if you’re using a large enough sample over a long enough time horizon. It’s easy to obsess over creating the perfect system or trading strategy, but there’s no use in over-optimizing.
Michael Melissinos, Melissinos Trading LLC
And he’s not just saying it from a theoretical standpoint. Michael’s firm which invests on behalf of investors globally, including high net worth individuals, funds of funds and entrepreneurs takes a technical trend-following approach. This is based on research, so he’s learned from experience that this approach is effective.
Michael’s second piece of advice is that,
“The most important thing in systematic trading is actually doing all of the trades.”
Michael Melissinos, Melissinos Trading LLC
It would be hard to counter that.
As you’ve probably noticed, there’s not one single “correct” way to invest. In fact, some of the individuals featured in this article give contradictory advice!
However, there are some general principles to keep in mind. Be patient, don’t take unnecessary risks, and think about what your long term goals are.