Third, how shockingly bad investment decisions a twenty-something can make when given the money to experiment. When I barely knew my brokerage account bank teller, the unholy trifecta of penny stocks, leveraged investing, and early 401(k) withdrawals formed.
congratulations! Considering you read the book before taking the leap, you are already three steps ahead of me. We hope the harrowing story below provides a bloody picture of exactly what investment decisions to avoid (and how to survive if you still make them).
1. I bought penny stocks at the recommendation of my family.
“So, a friend of mine runs a company and I’m an investor in it. I have a good feeling.” John looked at me, realization shining in his eyes. What did he know that I didn’t? Sure, that seemed dangerous, but this was different. He knew the founder. It had to be worth something. I was in.
A few months later, John returned. “Have you looked at the inventory?” I opened my investment app. oh! Assuming you exited, you were already making money. But John was doubling down, so I was doubling down. Then again, what did he know that I didn’t? The answer quickly became clear. There was nothing.
Like most penny stocks, the stock’s value plummeted. I lost most of my investment. To make matters worse, I realized that I had no insight into the company itself. Why was there a stock tank? I didn’t know. Was the company struggling? Not a clue. In short, I want family ties to replace due diligence.
Take-out
Think twice before investing in a company you don’t know based on the recommendation of a friend or family member. In hindsight, if that recommendation had come from a stranger, I would have gone into penny stocks (a category I avoid), even if that stranger happened to “know” the founder of the company. I would not have invested blindly.
2. 25% of the portfolio was leveraged.
During the stock market boom in early 2020, I leveraged more than a quarter of my investment portfolio. The business was doing so well that I thought it would be a good idea to take advantage of the low interest rates and buy stocks on margin and make a profit. That worked until the stock market crashed.
My brokerage, Robinhood, imposed multiple margin calls on me, forcing me to sell when I wanted to hold. I ended up losing thousands of dollars more than I would have if I had leveraged a smaller portion of my portfolio or avoided investing on margin altogether.
Take-out
Expect your stock portfolio to decline by at least 75% and plan accordingly. The lower the margin, the less likely you are to be forced to sell at the worst possible time. If you’re a long-term stock picker like me, your portfolio is likely to blow up at least every 10 years.
3. I took money out of my 401(k) early to cover the margin call.
One bad investment decision leads to another. I was so stressed out trying to pay off a leveraged loan that I chose my 401(k) as a place to take my money out. In hindsight, it would have been cheaper to sell the shares in my taxable brokerage account.
My retirement broker, Fidelity, charged a 10% early withdrawal fee for the privilege of withdrawing from my 401(k) before retirement. Calculating costs and benefits was so stressful that I lost more than $1,000 in one fee and was stripped of my tax benefits.
Take-out
Prioritize withdrawal from taxable intermediaries. That way, you won’t have to pay hefty fees on withdrawals from your retirement account. Holding individual stocks because you’re worried about missing out on upside means timing the market. That’s not how I invest. I don’t time the market.
How I survived my 3 worst investment decisions
The reason I overcame all of my worst investment decisions was by starting small and early.
I invested less than $1,000 in penny stocks. I paid off my margin balance as soon as possible and reduced the downside. I was too early in my career to lose tens of thousands of dollars in early withdrawal fees.
I’m glad I took the advice of an experienced investor and started investing early. That way you can make mistakes without incurring too much debt. I don’t regret making any mistakes because I have learned from all of them.
A good stock broker will make it easier for beginners to struggle like I did. Find a cheap place to dip your toe into the stock market. Click here to compare the 10 best online brokers.
Do you expect to learn difficult lessons? It’s better to start early. You have less to lose.
