Now that 2020 is finally drawing to a close, it is an apt time to review my financial goals and strategies. But on top of that, I would like to also reflect on and share the mistakes that I have made since I began my investment journey so that I don’t make the same dumb mistakes again in 2021 and beyond. Hopefully you can glean some learning points and avoid paying the price I did when managing your own portfolio.
Mistake #1: Wrong position sizing
The first lump sum stock purchase I made was for Parkway Life REIT (C2PU) in 2017. Without the ease and safety net of a DCA arrangement, I faced the problem of having to figure out how to size my purchase. How many shares should I buy? Is it too much or too little?
Eventually, the fear of shelling out a four- or five-figure sum (the largest purchase in my life then) resulted in me paying a substantial percentage of fees in proportion to the size of the purchase.
Takeaway: Size each purchase accordingly
I have learnt to size my purchase accordingly by factoring in not only fees but also its size in relation to the rest of my portfolio and purpose of the holding, both for new holdings or accumulating existing holdings.
This is important for maintaining your desired portfolio allocation and not doing so may require rebalancing thereafter. Making many small trades might also lead to paying too many unnecessary fees which could impact returns.
Mistake #2: Succumbing to FOMO
I know, I know. Feelings should never be involved in any investing decisions but the fear of missing out was real when the price of the stock I wanted to purchase kept climbing when I was still deciding to pull the trigger or not.
And what was this FOMO stock that I just had to have, you may ask. It was Sembcorp Industries (U96) ha ha. I was considering adding SCI to my portfolio and but when it hit my target price, I did not submit the order as I was still hesitant and not very confident of my decision.
However, as the price continued to rise over the next few days, I let my emotions get the better of me and submitted the order at a price above my initial price as I feared I was “missing the boat” and wanted a piece of the pie pronto.
This was a terrible decision in itself as I was investing emotionally, and subsequently as time has proven, a tragic move because the stock price of SCI has been declining steady since end-2018 and never recovered till today.
Takeaway: Avoid emotional investing
Never, ever let your emotions guide your investments. This is truly easier said than done as it is so easy to be influenced by what we see and hear on the reg. But controlling our emotions and behaviour is such a necessary and underrated skill when investing that we all ought to master in order to be successful in our investment journey.
This mistake is on me and my lapse of judgment and I have since written this off as school fees paid to learn how to invest properly. Despite the (still lingering) pain SCI has caused me, it has taught me 2 extremely valuable investing lessons with mistake #2 above and mistake #3 below.
Mistake #3: Not following my stop loss plan
As part of my investment decision-making process, I determine both my entry and exit price. This includes the safety margin I have set for myself and the threshold to cut loss should the share price fall and/or fundamentals change.
As a newbie investor, my time with SCI was a tumultuous one as I experienced volality like never before. I was actually rather nonchalant at the beginning but as the share price fell closer and closer to my stop loss price I had to sit up and take action.
But I did not. For three reasons: I was reluctant to realise the losses, I believed that the share price would recover, and I did not want to admit that I made a bad investing move right from the start. Eventually, I quashed my ego and sold off my position in SCI as I did not want to spiral further into the sunk cost fallacy.
Takeaway: Stick to the investment plan
The solution to prevent making such a mistake again is simply to stick to the initial plan and remember my motivations for every investment decision that I make.
If you don’t have an entry and exit plan for your stock purchases, you should start thinking about them. Buy and hold forever is not good enough and a cop out for not being responsible for your investments.
Investing is a conscious process and not a whim of the moment thing. Having a sound investment plan is good practice, makes us better investors, and fundamental to achieving our financial goals!
Do I regret these mistakes?
Not really. I believe that making these mistakes have helped me to develop my investing skills and become a better investor and I am not afraid to admit them. As the old adage goes, you only learn how to invest when you have skin in the game.
Like many new to investing, I have made my fair share of mistakes (made more than those 3 above – will write about the rest another time) that have set me back on achieving my financial goals but I have since learnt from them and am determined to keep moving forward. With less mistakes, of course.
As we enter 2021, lets all be self-aware and reflect on how we can become better versions of ourselves in all aspects of our lives, including managing our personal finance. Charge on, everyone!!
Disclaimer: I am currently vested in Parkway Life REIT.