Learning is Doing – You Can’t Afford Not to Make Mistakes

Not doing anything when you don’t know what to do can be worse than doing something and making adjustments later. I see this all the time with young professionals and their investments. Many of them have built successful careers or businesses in a non-finance or non-investment related field. As such, they haven’t devoted their time to learning about investment strategies or financial markets. And because they recognize the value of expertise, they are hesitant to dive into financial markets, for fear of making a mistake. 

Unfortunately, this hesitation, while understandable, can have a devastating impact on your finances. I wrote about this in an analysis where I evaluated the impact of time on investments, compared to the amount invested, and investment performance. In my analysis, I showed that time is likely to be the most important factor in your overall wealth.

I like to imagine myself as very familiar with financial markets and investments. But I wasn’t always like that. I didn’t have any knowledge of financial markets until I was in my early twenties. That was when I opened my first Roth IRA account with the little bit of money I had left over from my deployment to Afghanistan (I had frittered away almost all of the money). 

With my new account open, the broker who had helped me open it, set me up with a high commission mutual fund product. I didn’t know anything about mutual funds so I happily obliged when she laid out her recommendations. I became obsessed with checking on the value of my account (a classic mistake that I’m still prone to make). But slowly and surely, I started picking up tidbits of knowledge.

Eventually, I started questioning why nearly 6% of my investment was disappearing immediately after my automatic investment deposits (high commissions). Next, I found out that I didn’t even need to be paying a commissions at all. Encouraged with my new found knowledge, I opened an online brokerage account and deposited a whopping $50 into it. Convinced I knew what I was doing I promptly made a $50 investment in Wal-Mart. 

When the dust settled on that first purchase, I began looking around for other investments to make. There were “opportunities” everywhere! Everyone had advice on investments and I was ready to take advantage with my online account. I even closed out my Roth IRA and put it in the online account (a tax mistake I wouldn’t realize until later).

As the number of investments increased, and priorities like college became demanding, I realized I would have to invest more time. Unless I wanted to blindly put faith in companies, turning a blind eye to their financials, I had to find a different way.

I had accumulated a decent-sized portfolio for a mid-twenty-something. I was learning a ton of information about past mistakes I was only just now realizing I had made. It occurred to me that learning will only happen if you give it an opportunity to happen. Learning about investments, through books or classes, won’t do you any good unless you are making real mistakes.

Armed with new-found knowledge about markets and taxes, I set about selling most of my stocks and buying exchange-traded funds (ETFs). These ETFs had low management fees and none of the associated commissions from my first investment. Plus, I could replace the several dozen investments with a handful of ETFs.

I also realized the multi-thousand dollar mistake resulting from cashing in my Roth IRA and placing the funds in my taxable online account years prior (a mistake I’m still ashamed of!) But to be honest, I’m not sure what I would pay for all I learned by making my own mistakes.

I wasn’t rich or well endowed when I started. There was no seed money from family or friends for me to make mistakes with. I didn’t need it, and you don’t either! Long gone are the days where only several thousand dollars are required to open a brokerage account. Today you can open up an account for absolutely nothing at all! Better yet, you can buy fractional shares in companies! So even if you can’t afford a whole share of Wal-Mart, you could still buy a tenth of a share!

Let’s be clear; I don’t want you to go out and make catastrophic mistakes with hard-earned money. But even though I made a ton of miserable mistakes, I still find my investments in a fantastic position. I am well on track to retire on my own terms at a young age in spite of my mistakes. And the reason is not that I have beaten the market (far from it). Nor because I’ve invested more of my income than most (although that probably helps). The main reason is that I now have a decade of growth in my portfolio.

But none of that would have happened if I was too afraid of making a mistake to even start! And because I did start and made horrendous mistakes, lessons were more salient. For many years “LEARNING IS DOING” was written in big letters on my office whiteboard. I wrote it one day as I was getting frustrated trying to figure out the treasury direct website (where you can buy bonds directly from the government). I wrote it as a reminder to myself that, for me at least, the only way I learn well is by doing and failing.

You don’t have the time to not make mistakes. And if you like, I can show you how to make fewer mistakes. But if you don’t want to work with a financial planner or you’re unsure, don’t use your ignorance as an excuse to do nothing.

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