Monday, May 12, 2014

My investing mistakes through the years

The very first investment I ever made was during my college years at Chapel Hill.  I had a little bit of money saved up - maybe 5,000 dollars - and decided to try investing it. Every year, Money magazine published an article listing the mutual funds with the highest annual returns. Sometime in the last 1980s, at the tippy-top of this list was a mutual find called the Tiger Fund, with a return for the year of 90%.

So of course, I put all my money into the Tiger Fund.  Who wouldn't? Why settle for number two, when you could put your money into number 1, and earn close to a 90% return?  Of course, you probably wouldn't get exactly a 90% return the next year. But I figured it would get pretty close - say, 60%. So I'd have no complaints.

Yes, that's really what I thought back then. I usually have a strong leaning towards skepticism, but certainly not in this case.

I lost a good amount of money in this fund, and then got out.

The very next investment I made was a closed end mutual fund. My parents are Austrian, so when I saw that a closed end, country-specific fund for Austria had the highest annual return of all closed end funds, I was drawn to it.  After all, Eastern Europe was just opening up, and Austria, bordering at that point with Czechoslovakia, Hungary, and Yugoslavia was a natural to take advantage of new opportunities. Right?

Well, that was another fiasco. I got out of it after losing what was, to me back then, a lot of money.

This wasn't the end of my investment strategy of chasing last year's highest returns. I experimented with a biotech mutual fund (I didn't do as badly with that one), and a few others.

But I gradually wised up. I read up on investing strategy, and started investing in broad based index funds exclusively.

Some of my favorite books were The Only Investment Guide You'll Ever Need by Andrew Tobias and The Four Pillars of Investing by William Bernstein. Reading these convinced me that I'm not Warren Buffett, that I wasn't going to be able to beat the market in general, and that I'd be better off not even trying.

Right now I stick with a well-balanced portfolio of a few index funds. It's not interesting, and it's not ego-boosting.  You can't tell people how your investments are beating the markets because of your well-chosen plan. But it's easy, and stable, and works very well.

I've thought about how to teach my two children about investing. However, aside from some basic table talk about how investing works, and what a stock is, it's premature for them. First they need to learn how to save money (ideally their own money, that they've earned), and only then, investing. So we have some time to spare.








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