Rookie Mistakes Even Experienced Investors Make

Well, hello and welcome back in to Mr. Stillman's Opus.

Glad to have you on the podcast today. Got a good show for you. I'm talking about rookie mistakes that even experienced investors make. Jon, you probably see this all the time. I know you work with some pretty experienced investors, but even for those guys and those girls and guys that have been around for a while and been doing it for a long time, we could still slip up, can't we? It's been known to happen, yes.

Not a thing that you automatically master just because you've been doing it for a long time. Everything's constantly changing, as always. How's everything with you in the office? In the barn, doing great.

Little chilly sometimes. What's the latest project we're working on? Farm-wise, well, I have this greenhouse that I'm trying to get built before, you know, it's time to start the seedlings, which is kind of like, you know, last week was my goal.

So I've got the greenhouse. It's just like it rains every Saturday and I don't have time to do it. Or then I had COVID and it's like, well, one of these days I will get this done. You're on the COVID train too now, huh? Yep. I mean, I was sick for like a day and a half, but it happened to be that the full day of that day and a half was a Saturday.

So I lost another weekend. Wonderful. Wonderful. Well, I'm glad you're feeling better and we're looking forward to hearing more about what you got going on on the farm, because there's always a new adventure, it seems like. So good to hear. Let's talk a little bit about these mistakes investors make. And again, if you have questions, feel free to follow up. John's happy to sit down with you and chat.

Eight hundred five four five twenty nine ninety one is the number. Investments with no purpose. John, what do we what do we mean here when we're talking about, you know, investments for no purpose, this being a mistake that the people still make, no matter how long they've been investing? Yeah. So from time to time when I'm at dinner parties, which, as you know, I go to a lot of dinner parties. Was pre-COVID the last dinner party you attended? I'm not positive I've ever been to a, quote unquote, dinner party. But it's the thing that people say when they talk about their professional lives intersecting with their personal lives.

Well, you know, people ask me this at dinner parties. So I'm not the kind of person that's like, well, no, you don't want to talk with me about work outside of work. I'm not interested in that. If you'd like to ask me about investments, like make an appointment on my calendar.

I don't care. I'm happy to talk with you about it any time. But often people will come up and say, hey, you know, I've got like one hundred thousand dollars. What should I do with it? How should I invest it?

And again, I'm happy to have the conversation, but I will warn you, this is probably going to be a more in-depth conversation than you want, because I'm not just going to say, oh, you know, what's great right now? Go invest in fill in the blank because I need to know what this money is for. What's the goal of this money?

What's the purpose of it? So often we can solve this problem by simply asking that question. Well, what is this money for? And then sometimes people will say, oh, well, this is for my son's college and he goes to college in eight years or well, this is where we're saving to buy a car in a couple of years or this is eventually going to be a down payment on our next house within the next five years or so. Or, you know, maybe they have some other specific need. OK, well, from there, if we know that, that can kind of start to dictate how we might want to invest it if we know what that money is for. But more often than not, if I say, what's this money for?

The answer is, well, I don't really know. It's just I kind of want it to grow over time. Maybe it'll be a long term investment, but maybe I'll use it for something in the short term. I don't really know.

I just want it to grow. OK, well, now we have to take 17 steps back further and really get to know you and your situation and what's going on in life. Then we can help figure out, all right, what is this money for? Because we have to know that before we're going to invest it. So a lot of times, well, not a lot of times, but sometimes I will have people come to my office and it's like, look, yes, I have two million dollars, but I have this three hundred thousand dollars in this one account. And I just want you to tell me how to invest this three hundred thousand.

Had a fellow in the office probably six months ago, and this was kind of his mindset. Tell me how to invest this three hundred thousand. And I start going through all these questions because I'm trying to get to know him, trying to figure out what's this money for, because he clearly didn't have a well-defined idea of what this money was for. And so I'm asking all these questions and he's like, let me let me stop you right there. I'm just looking for some investment ideas for this three hundred thousand.

Yeah, I understand, but I can't just give you ideas until I know what would actually be a fit for you. So again, we're going back. I'm asking all these questions. And after a while, he was, I think, understanding how this worked, but still was sort of annoyed by the process. And, you know, we got to the end of our conversation and he just he didn't have definitive answers on much of anything. Didn't really have a purpose in life. Didn't really have a purpose for his money. No clear mission. He had more money than he needed.

His retirement income was fine. He just he just didn't have a clear purpose or a mission for anything. And what I told him was, well, look, here's some ways you can start to get some clarity on those things.

So why don't you go home and spend some time thinking about this? And I gave him a pretty specific list of things to think about and plan around. I said, once you have some clarity on that, well, then we can talk more about what would make sense for the money. And I remember he kind of muttered as he walked out the door. He just said, I just wanted to know how to invest three hundred thousand dollars. Never heard from him again, which is fine. I think most people appreciate the exercise, but some people just want an easy answer.

How do I invest this money? Well, we have to have a purpose. And if we don't know the purpose, it's really a pointless conversation.

That's funny. I'm assuming that there's probably a lot of people like that, right? I mean, the people that haven't actually sat down and done some some planning are probably in kind of that very similar boat where they're just kind of free floating and saving, maybe saving well, but just not having any intended outcome for everything. Well, when I think about the dozen people or so every year that might ask me just a broad question, how do I invest this with no no other information or purpose attached to it? And I extrapolate that over the three hundred and thirty million people in the country. I figure, yeah, there's probably a lot of people that are investing their dollars with no particular purpose.

I feel seen right now, just for the record. All right. A risk. Risk is another thing that pops up all the time with with investing and the mistake that people often make, kind of similar with not having the purpose of their money, is just not completely understanding how much risk you have.

Right. So risk can be problematic in a market that keeps going up and up and up because you lose touch with your comfort level with risk. So in like twenty nineteen, when the market had done nothing but go up for a decade, we had a lot of people that thought they had a really high risk tolerance. And it's because they had been taking a lot of risk and they had been rewarded for it year after year after year after year. And so what they thought was that their risk tolerance was getting increasingly higher because they just had this positive reinforcement over and over and over.

And then, of course, the beginning of the pandemic hits and from mid February of twenty twenty to mid March, they lose 30 percent of their account balances. And now suddenly they're very conscious of risk. Well, did their risk tolerance change? No, they just became more aware of what their risk tolerance actually was. Now, there were other people during that era and then also those same people in twenty twenty two who would say they have a high risk tolerance and then they go through something like the beginning of the pandemic or the twenty twenty two calendar year and they say, yeah, you know, well, that's that's kind of what I would expect out of this roller coaster type of investment account that I have.

So it's fine. I know it'll come back in the long run. OK, well, they actually have that high risk tolerance, but you tend to lose touch with what your risk tolerance is when everything's going great. The other place I see people kind of forget about risk is with investment properties. So people will get their risk meter broken on that, because if you could see the value of your house on a daily basis or of an investment property that you have, it would drive you probably as crazy as watching your stock market account jump up and down. There's just not a reliable way for you to truly see that value. I mean, yes, we have the Zestimate or whatever, but that's not really a true reflection of the value of your house. So people tend to lose touch with the fact that, yeah, there is risk involved with owning property like that. Interesting.

All right. Talking about the rookie mistakes that even investors experience investors make and emotions always creep in. I don't know. I don't know that anybody out there, even the best investors. I mean, Warren Buffett has to even feel emotion at some point. Right, John? And let that creep in.

Yeah. I mean, I think probably anybody who's intellectually honest with themselves would acknowledge that emotion at some point, at some level, plays a role in decisions they make. I mean, again, I'll use 2022 and the downturn we saw in the market last year as a great example. I mean, there were people who were, as I just described a minute ago, very rational about it and say, yeah, this is what happens. It's actually a good time for us to put money in.

And then there were people who were just losing their mind. And often we see it with folks that are early on in their investing life, which if there's anybody who should not be concerned about a market downturn, it's somebody who's 28 that has $5,700 in their retirement accounts, right? Because they're not going to touch that money for 40 years. So of course today's downturn is irrelevant and they don't have much of anything in there. So the fact that you went from $6,300 to $5,700 is a meaningless loss.

But to them, it's not meaningless because this is the first time they've done it. It's the first time they've been through a big downturn. Meanwhile, you have somebody who's 63 who goes from a million to $830,000 and they might shrug it off because they've been through it before and they understand how it works. So there's an irony there because the guy who is 63 probably needs to be invested a little more conservatively and not having his investments have so much potential downturn attached to them. And then the guy at the front end who's just getting started needs to understand this is not a time to be emotional.

Just stick with the program. So more conversations that I had in 2022 with people that were being emotional about the market crash, there were more of those conversations had with people earlier on in their investment life, interestingly, the people who needed to worry about it the least. I do remember in 2008, I'd been about a little over a year into my first job with a larger company and with a 401k and doing all that.

And so my balance is right around what you were just talking about. And it was a year in and then boom, 2008 hit and saw that huge pullback and I was going, oh, man, this is the worst. But now like 15 years later, I was like, wow, that was a blip on the radar compared to what some things could be. Yep.

Yeah. I remember one of my first jobs, the lady came in to tell us about the 401k and it was people in the room that were just eligible for the 401k and then some other people in the room who had had it for a year or two. And she was talking about how, you know, over time, this is going to go up and she called on somebody who had been in the plan for maybe a year and a half and said, how has it looked over the last year?

And this was, you know, kind of in that realm, that 2008 sort of period. And he's like, I have less in it than I had a year ago. And everybody just cackled like, ha, he showed her what, what an idiot she must feel like. And she's like, yeah, exactly. So you have to understand that that doesn't matter. And all that money you're putting in right now is buying more shares of whatever it is than it was buying a year ago. And I remember that being a moment where everything kind of clicked for me where I thought, oh, okay.

It truly doesn't matter what my retirement money did between the ages of 24 and 25. Yeah. So young and naive we were. Yep. Glory days. All right.

Let's, let's close out with one more here. The hot tip. I think we all, we all will succumb to one of these at some point. You have a good friend that you trust, a family member that just, they sell you pretty well. They can tell you that this is going to be the next big thing and you just can't resist. So before cryptocurrency was a thing, if somebody had a hot tip on an investment, it was generally going to be what? Some kind of stock, right?

Yep. And so it's really interesting to see this in action because we have most of our clients, probably 90% of our clients, we don't have invested in any single stocks. They're all in various funds, but we do have a few people who for strategic reasons, we're using stocks.

For other folks, it's just because they like it. They like having stocks as part of the picture. They like having individual companies to root for and it's just easier for them to track. So obviously we're not going to be all in on individual stocks and their investments, but we'll maybe throw some in just to give them something to kind of follow and root for. And so it's really interesting in these situations where like I can think of one specific case where let's say it's $500,000 in the account. And you know, most of that account is in funds, but then we have four stocks that we invested in that account. And I remember looking at it and after about a year and a half of all of those funds and the four individual stocks, if you looked at the performance of every single thing in that portfolio, the two best performers were two of those four individual stocks. And then you had all those funds and then the two worst performers were the other two individual stocks. And if you looked at the total performance of the two good ones and the two bad ones, even with that small sample size of four stocks, it pretty much averaged out to be the same return as all of the funds did that were much broader, much more diversified.

So the point is, now we got lucky on that one because it was only a sample size of four. But generally, the more individual stocks you buy, the more industries you have represented, the more likely it is that you can kind of mimic the performance of the market as a whole. But if you just say, well, I'm going to buy one or two and I'm going to try to pick a couple of winners, think about the dice that you're rolling, Ben. Like, look what we just saw in that case, her two best and her two worst things were the individual stocks.

Well, what if you were just trying to pick one stock? It's like you could do great or you could get creamed, you know, and it was just interesting to see that actually play out so perfectly in her situation. Yeah, that's great. Great example. Well, what role, Jon, do you play as an advisor for people, you know, just to help them avoid these types of mistakes? Well, it always goes back to that very first thing we talked about. What is this money for? Or in some cases, who is this money for? That's always going to dictate how it should be invested. And then along the way, we have to remind you of things like risk and let's not be emotional and things like that. But it all goes back to that anchor of let's identify the purpose of this money. And if the purpose of that money changes, well, obviously the way we're going to invest it is probably going to change. But that absolutely has to be where we start. What's this money for? All right, a couple of different ways to get in touch with Jon over at Rosewood.

You can log on RosewoodWealthManagement.com or simply call or text 800-545-2991. All right, we'll close out this episode of Mr. Stillman's Opus. Thanks for being here. And please make sure you subscribe. We'll talk to you again soon. Jon, have a good week. Same to you, my friend. Carolina Wealth Stores doing business as Rosewood Wealth Management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.