One of the beginner’s mistakes in investing is to go all-in on a single asset, in a single transaction. The assumption behind this practice is that “an investor must be able to predict which asset will bring the most profits.” Millions of investors experience over and over that this is not the case.
The best way to invest for the average investor like you and me is to diversify our investments among different assets and to invest gradually over time. At the moment of writing this post, my investments include Bitcoin, Silver ETF’s, and individual stocks. I have even some put options, which will bring me profits if the underlying ETF loses value.
My investment portfolio is far from perfect.
That is one of the reasons I am writing these investment series. I’m just writing down everything I know, so that I can apply my knowledge in real life. My biggest mistake at this moment is that the portion of my cash saving is greater than optimal. Some cash is necessary for emergency situations as well as to reduce the volatility of the portfolio in case of a market crash. However, the portion of cash in my portfolio is greater than necessary. That’s because I wasn’t focused on investing last year. However, this year, I’m going to do the work and get a good portion of that cash into the market.
I Sold Too Early.
So far, I’m happy with the investments I made. I’m disappointed with the investments I haven’t made or sold too early. I have sold Ripple (XRP) too early, before it started its tenfold appreciation. I have sold 2/3’s of my Bitcoin holdings when it broke through $10K. Both mistakes point to one of my basic investment rules: “the more you trade, the more you lose.”
ETF’s and Index Funds
As a retail investor with a limited time and budget, you might find it difficult to research, invest in, and follow multiple assets. ETF’s are a great solution to that problem. ETF’s are exchange traded funds. You can buy and sell them like a stock in the stock market. However, they can combine multiple assets in a single instrument. If you buy an etf that tracks the S&P500 index, you are immediately exposed to 500 largest companies in the US stock exchanges. Another ETF I like is the one that tracks the price of gold. Instead of buying, storing, and selling physical gold, I just buy the ETF of it. It’s much more practical.
If you don’t have the time to do your research, it’s better to invest in ETF’s than keeping all of your savings in cash.
Unfortunately, I didn’t invest in S&P500 or gold ETF’s last year. That would be the perfect way to invest my excess cash. My underlying assumption was that I needed to make my research and buy individual stocks. That is not necessarily a bad assumption, because I made some profits doing that. However, if you don’t have the time to do your research, it’s just better to invest in ETF’s than keeping all of your savings in cash, which is going to lose some of its value over time for sure.
If you have the time and if you are willing to do your research, you might want to consider small cap value stocks. They require a lot of research and they involve higher risk, but the rewards can justify the work and risk.
Small cap value stocks have performed better than the market in the past.
Small cap stocks are the ones that have a smaller total market value. Value stocks are the ones that are valued lower relative to their fundamentals, such as price to earnings ratio. The definitions of both terms vary among different resources, so please do your own research and come up with your own definitions.
It requires a lot of research to find small cap value stocks. When you find those stocks, you need to read their quarterly and yearly reports thoroughly. Once you have done that, it’s up to you to decide whether you want to invest in that stock or not. Even if you decide to invest in that stock, it’s important to allocate a small portion of your portfolio to them. My rule for such cases is to not exceed 5% of my portfolio.
Cutting the Trees and Watering the Bushes
If things go according to plan and the stock or another asset appreciates, I don’t trim my position to keep the allocation of that stock below 5%. I believe in the rule, “you can’t get rich cutting the trees and watering the bushes.” Cutting the trees and watering the bushes refers to the practice of trimming your winners and investing more into your losing positions to maintain the balance of your portfolio.
Here are the rules that I have mentioned in this post.
- Keeping a portion of your savings in cash is good for emergency situations and to manage the effects of a possible market crash.
- It’s better to decide on an optimal ratio of cash to complete portfolio. If the cash exceeds that level, it’s better to invest it.
- If you don’t have the time to research individual stocks, it’s better to invest in ETF’s than to not invest at all.
- If you have the time to research individual stocks, considering small cap value stocks is a good idea, because they outperformed the market in the past.
- Diversification of a portfolio doesn’t mean to trim the winning positions and investing more into the losing positions. Consider diversification when investing, not when liquidating. In other words, avoid cutting the trees and watering the bushes.
My goal in these series of investment related posts is to point you to a direction. As you can imagine, there’s a lot more to learn about investing. I want to recommend a book and an audiobook related to the topics in this post.
- One Up On Wall Street by Peter Lynch
- The Art of Investing: Lessons from History’s Greatest Traders by Professor John M. Longo (can be found in audible.com)
This post is for information purposes only and not intended to be investment advice.
Software developer with a Ph.D. and 15 years of experience. I write daily on personal development and life lessons. Sign up to my email newsletter to receive a weekly overview of my latest content on personal development and life lessons.