Three mistakes which slowed down my path to financial independence
The following article is written by Simon from Financial Expert. Simon is currently enjoying a mini-retirement (a self-funded break from work). He credits his financial success in sticking to a frugal lifestyle and by investing wisely.
I've asked Simon to share three investing mistakes he made when he began his path to financial independence that might gives us all useful tips on how to invest for passive income success.
Mistake 1: I was an investing introvert
The first mistake I made did not affect my personal wealth, but that of my parents.
In 2012, my parents sought financial advice from a qualified financial adviser. This was at a time when advisers earned generous commission payments from the mutual funds they directed business to. The more expensive the fund, the more it could offer as payment, and therefore the more enthusiastically it would be recommended by advisers.
My parents were caught in this conflict of interest trap. They were sold a fund which charged an extortionate 3% fee just to access the fund. Once there, their money would be subject to an excessive 1.4% deduction for management charges.
This means that my parents were charged 4.4% of their assets (which equated to thousands of pounds) in their first year, for the simple pleasure of sitting in an expensive-yet-unremarkable equity and bond mutual fund.
At the same time, I was personally exercising very tight control over the fees I was paying fund managers within my investments.
Why didn't I intervene and save my parents '000s? The answer is that I observed the money taboo. I didn't wish to pry into the details of their advice, and I purposefully remained outside of the conversation so that they would understand I respected their privacy.
It turned out that this caution was ultimately unnecessary. My parents showed me the investment prospectus almost immediately after they invested. My protests came too late to make a difference as the contracts had already been signed.
I have learned a great deal from this experience. In particular, I have vowed to not keep my knowledge to myself. I will still respect everyone's right to privacy, but I will bring more investing discussions into the mainstream. My friends and family members shouldn't feel like they need to navigate the science of investing in an isolation chamber.
It was in this spirit that I changed my website content away from topical news, and towards educational investing courses. My focus is now fixed upon sharing financial education and helping others avoid costly mistakes.
Mistake 2: Rather than diversifying my portfolio, I damaged it
Diversifying your investments is common sense. To reduce their risk, investors should always spread their money across multiple asset classes. Withing each asset class, they should further ensure they cover a diverse range of companies, sectors and geographies.
This is probably the first concept you would learn on an investing course; it's not rocket science. Early on, however, I managed to make a mistake in how I executed this principle.
Rather than simply using a small handful of funds to spread my money, I opened over ten different investment accounts. This gained me access to a huge variety of assets. These included; peer to peer lending, property crowdfunding, preference shares, equities and bonds.
With a strategic hat on, my perspective was that I was using all the knowledge I had gained to create a truly diverse portfolio. But what I was really doing was tying myself down and hampering my returns.
Because of course, with each account came quarterly platform fees, transaction costs, and a greater demand on my time. Managing this complex web of investments became a weary chore. Moreover, it became prohibitively expensive to drip feed my monthly contributions across so many platforms.
By pursuing a diversity of platforms and investment types, over a more simple interpretation of diversification, I had ratcheted my costs up and curbed my enthusiasm. Not a great move.
Mistake 3: I could not predict the market. Yet I believe I could.
This mistake is probably one of the most common pitfalls to new investors.
Having watched film and TV, everyone likes to think that they could be the winning stock trader who profits from making the "right call" every once in a while.
When you have the reigns to your own investing future, it can be difficult to overcome the urge to over-trade.
Perhaps you have spotted an upward trend that feels like it still has legs. Or maybe after a long bull market, you begin to feel nervous and fearful of a retraction. Greed and fee constantly impose themselves upon us, and this often manifests itself in bold trades that should never have been made.
Active trading was a game I only attempted once. I was burned sufficiently so that it serves as the only example in memory, but it was enough to learn a lesson.
I sold the UK stock market at the close of 2014, in the belief that more falls were likely over the beginning of 2015. Instead, the index soared and hit a new index record in the following two months.
I learned some humble truths from that episode. Not only does over-trading increase your fees, but it is also virtually impossible to beat the market using existing information.
This has been demonstrated by the consistent under-performance of the actively managed fund industry as a whole. If fund managers cannot do this successfully on a London trading floor, the I am satisfied that I cannot do any better from my armchair.
About the Author:
Simon writes content for Financial-Expert.co.uk which hosts a free investing course aimed at beginners, including topics such as how to invest in properties.