22 Jan My biggest investing mistake, and how you can avoid it
I’ve made all the common investing mistakes in my time and here are just some of them.
Never buy soaring growth stocks that have already risen to inflated values? I’ve done that. Some apparently inflated valuations turn out to be cheap and the shares keep rising — but not mine.
I made that mistake early on, in my growth investor phase. The strategy did no better than an index tracker overall, but with more heartache.
Become too attached to a stock and hang on to it despite the mounting evidence against it? I’ve been there too, letting emotional attachment triumph over cold hard fundamentals, and have lost money.
I’ve concentrated on buying and forgot to learn when to sell, and I’ve even been influenced by share price charts in the past. Name a mistake, and I’ve probably made it.
But even with all that, I’ve easily managed to beat cash saved in the bank, and I’ve had a lot of fun while doing it. And my biggest mistake is… not starting a lot sooner.
Time is your best friend
The thing is, it’s investing your cash in shares, reinvesting dividends every year, and doing that for decades that brings you success.
I was in quite well-paid jobs right from leaving university, but I spent my money and enjoyed it rather than stashing some away every month and buying shares. And it wasn’t until around 10 years later that I learned about the long-term prospects for the stock market. But what difference might my lost decade have made?
Let’s compare two individuals. One starts investing £500 per month in the stock market, and manages an average return of 6% per year. They start early and continue for 30 years.
Over that time, assuming every year’s profits are reinvested and compounded (and not taken as dividends and spent), our young starter will have accumulated a nest egg to the value of approximately £490,000.
Our second investor, like me, wasted 10 years of investing opportunity before the light bulb switched on. How much do you think they’d need to invest every month to match our early-starter hero?
You might be shocked to learn that even investing twice as much every month, for the shortened period of 20 years, still wouldn’t quite make it. £1,000 per month invested in shares for that period, assuming the same 6% annual return, would bag approximately £456,000.
That’s a shortfall of £34,000, but the biggest surprise comes from comparing the total cash invested.
Our first investor has plonked down £500 per month for 30 years, which amounts to a total of £180,000 — and turning that into £490,000 is very pleasing result.
But our second investor, who has been stashing away twice as much money every month for 20 years, will have invested a total of £240,000. It will have cost them a full 50% more to achieve a poorer result.
The lesson is clear. You should start saving money every month and invest it in shares as soon as you can — and keep on doing so every month, while buying even more shares with any dividends you earn.
If you’re in the position I was in, or that of our second example investor here, you obviously can’t go back in time and start again. But you can start today and not waste any more time.
What to avoid
If any of my investing mistakes strike a chord with you, I recommend you get yourself a copy of our Worst Mistakes Investors Make report.
The report asks top Motley Fool investors around the world for their advice on avoiding the worst mistakes investors of all ages and experience commonly make, and their collected wisdom should help you to avoid them.
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