If I Could Give My Younger Self 1 Piece of Investing Advice, This Is What It Would Be
If I could give my younger self one piece of investing advice, I’d find most of the material I’d need by reviewing my first-ever investment. My first stock was Lucent Technologies, which in 1996 was spun off from AT&T, and then bought by me at age 10 with all $500 of the birthday money I had saved up from prior years. Shortly after my purchase in late 1999, it began a long decline that saw its price fall 99.2% by September 2002.
The sting of that collapse kept me away from investing for about 15 years. So here’s the investing advice that I would give to my younger self if I had to do things over again — it’s one central theme, and it has three parts.
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1. Don’t put all your eggs in one basket
This advice seems obvious now, but new investors still need to learn it.
Funneling all your capital into one stock means one failure can wipe out most of your portfolio. Per research conducted at Arizona State University, about 4.3% of the nearly 26,000 U.S. stocks included in the analysis accounted for nearly all of the market’s wealth creation above Treasury bills from 1926 to 2016. That’s an argument for owning a large and diversified basket of stocks via an index fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO).
The lesson extends to the types of assets you invest in, too. The traditional 60/40 stocks/bonds portfolio split is timeless because holding bonds can make up for underperformance that stocks experience under certain conditions, and vice versa. Today, adding some cryptocurrency into your portfolio is another way to diversify even beyond that.
2. Accept that some eggs won’t ever hatch
If you invest in a lot of different companies, some of those investments will not play out.
According to a 2014 J.P. Morgan study, 40% of Russell 3000 index stocks from 1980 to 2014 ended up experiencing a catastrophic loss, which in this case is defined as a 70% or larger drop from the peak with little recovery afterward. In the case of my first investment, in the telecom industry, the catastrophic loss rate was 51%.
The bigger point here is psychological in nature. Expecting every one of your stock picks to work out is not reasonable, but investing requires us to be rationally hopeful each time. The truth is that failure in investing is inevitable, and vastly more common than success. Quitting after the first big failure, as I did, cost me years of compounding, and not having the proper context to process the defeat in a constructive way was especially deleterious.
