It’s time for some more money mistakes where we showcase some mistakes made by another fellow blogger out there. Even the smartest people can make mistakes with money and even us “experts” are no different. As always, the point is to learn from these mistakes and improve our financial situation moving forward.
Tell us a little about yourself
I am the founder and author of the Dividend Power blog, which focuses on building wealth through dividend growth investing. I am probably what I would call an accidental blogger, but it is something that I enjoy. I’m married and my wife and I have two school age kids that keep us busy. By education I an engineer/scientist and have advanced degrees. My day job is working on my medical device start up.
What was your money mistake and when did you make it?
I can think of several money mistakes that I have made over the years like most people. Some only resulted in lost opportunities but some are more costly. One important money mistake that I can think of that I made was staying in active mutual funds too long and not switching to passive index funds.
What led you to making the mistake?
I have been investing in retirement accounts since the 1980s. Back then active management was all the rage. The concept that star fund managers like Peter Lynch or Bill Miller could beat the market and benchmark indices every year was something that many but not all people accepted. I did not realize the disadvantages of active mutual funds until the dot-com and then the sub-prime prime mortgage crash.
How did you recover from it?
I made some changes during the dot-com crash, which mostly involved moving to mutual funds that did well during the crash. In hindsight, it was a decent move but not good enough. I moved from funds that were too focused on growth to funds that were more value oriented. This concept did well until the sub-prime mortgage crash came along. At that time, I moved almost entirely into passive index funds and have not looked back.
What would you have done differently?
I would have just invested and stayed in passive index funds for my retirement accounts from Day 1. Before costs, active mutual funds and passive index funds will perform roughly the same at least according to the efficient market hypothesis and a few other theories. But expense ratios negatively affect returns. Over time, most active mutual funds will underperform passive index funds by their expense ratio and costs involved with trading since they are generally higher. This concept was out there back then but not as widely accepted as it is today.
How can others avoid the same money mistake?
Do your research. Most poor investing decisions come from not acquiring knowledge. You can still make a mistake since it is investing, and you will not be correct all the time. But there is more information now that is readily available and there is really no excuse for not doing research prior to making an investment decision.
Most importantly, what did you learn from your money mistake?
I learned that investing is much more complex than I originally thought. But you can become a successful investor with patience, knowledge and learning, and structure and discipline. I also learned that John Bogle was correct in that you want to pare expenses and costs to the bone in order to capture as much of the market returns that you can when investing in mutual funds. No investor will capture 100% of market returns over time but you want to get as close as possible.
Anything else you want to say?
Everyone makes mistakes when investing that is just part of the process. You learn from experience.