Stupid Mistakes Part II: The End Of An Era

For all my talk about the beauty of index funds and passive investing, and how stock picking is basically the root of all evil, I have a tiny confession to make.

The truth is, I haven’t solely been investing in index funds. In fact, my portfolio has had individual stocks in it, and plenty of them. I have even dabbled in a few actively managed mutual funds (gasp!).

Now before you start screaming at me through your computer, phone, tablet or whatever you’re reading this on, I have some news to share.

Today is the day I am officially retiring as an active investor. I finally decided to give up the fantasy that I can outperform the market and have sold all of the individual stocks that were left in my portfolio.

And let me tell you, there were there some doozies over the years. So let’s take a look at some of the highlights of my ridiculous active investing career.

Bank of America (BAC)

The year was 2009 and I had just received $1,000 from my Grandparents for my 20th birthday. I was intrigued by the stock market and wanted to use that birthday money to start my investing career. My dad recommended I select a few stocks I was interested in and then meet with Tim, his investment advisor.

So I did some research and went downtown to meet with Tim in his fancy corner office. He looked to be in his mid-to-late 40’s, wore a pinstripe suit and had a handshake that screamed success. I told him that after all the stocks I researched, Costco really stood out to me. It was trading around $45 a share at the time.

Tim politely nodded and smiled as if to say “nice try kid”. He quickly dismissed my idea and said that he had a “more suitable” recommendation (what that meant, I wasn’t sure). Bank of America. A true leader in the banking world and it was trading at just $20 a share. He called it a bargain with way more upside potential.

And who was I to argue? This was what he did for a living. He had his own secretary. So I invested the entire $1,000 in Bank of America.

Can you guess what happened?

By 2011, the stock had plunged all the way down to $5.44 a share and then took five more years just to surpass the $20 mark I started with.

Costco on the other hand? Currently trading at around $200 a share and the company is probably throwing huge annual pool parties for its investors to celebrate (at least, that’s what I’m picturing every time I think about it).

Not only was I in the completely wrong stock, but I realized years later that I was also being charged a 1.5% management fee just for owning the stock. Tim was charging me every year for doing absolutely nothing. How is this not considered stealing? It really, really should be.

Federal National Mortgage Association (FNMA)

So what exactly does “Fannie Mae” do? Wikipedia says it is a program sponsored by the US Government that guarantees certain mortgages. And it was bailed out during the ‘08 housing crisis. That’s all I really know.

What led me to this stock? I bought it on a tip I got from a friend in 2013. And what was attractive about it? It was a penny stock trading at just $2.88 a share, down from its peak of $65 in 2007. So I bought 516 shares and remember thinking wow, this thing will go up tenfold!

It didn’t. And I just sold it at $1.38, less than half of what I bought it for.

General Electric (GE)

I bought this stock at $22 a share in 2016. GE was a much safer bet in my mind. A stable industry titan, a household name, and pays steady dividends to its shareholders.

But I guess it decided not to participate in the tremendous rally the stock market has been on and is trading at just $13 a share.

And last but certainly not least…

Direxion Daily Gold Miners Bear 3X ETF (DUST)

I know what you’re thinking. What the hell is that? It’s a good question because I still don’t have a clue. And I’m sure the next question you’re wondering is, why?

In my defense, I had just received a fresh tax refund in 2015 and was looking for a hot stock to invest in. So I went to Yahoo! Finance and came across a very convincing article talking about this particular investment and its “lottery-like upside”. It had something to do with shorting the gold market.

Not only that, but the ticker symbol was DUST, my nickname. Done deal.

That was the extent of my due diligence, I kid you not. The whole process took about ten minutes.

So how did it do? I sold it two years later after losing 80% of its value. Not only that, but the investment had an annual expense ratio of 1.5% just to add salt to the wound.

Calling it a day

I have a bachelor’s degree in financial planning, I’m a CFP, I love all things personal finance, and I work as an investment analyst where it’s my job to analyze the markets. But when it comes to picking individual stocks, this is what I have to show for it.

From 2009-2017, my individual stocks and actively managed mutual funds returned a total of just under 8%. Hey, at least I didn’t lose money, right?

Well yes, but a simple S&P 500 index fund would have returned over 200% during that time. It’s time to hang up the cleats and call it a career. Index funds all the way from now on.

Why am I telling you all of this?

Because I’m figuring out how to navigate this life just like you are, and learning from my mistakes along the way. This was me in the depths of my financial sleepwalk. And if nothing else, I hope this serves as added confirmation that picking individual stocks just doesn’t work.

And actively managed mutual funds that charge you a fee to pick individual stocks for you – they don’t work either. In fact, it has been reported that over 90% of all actively managed funds fail to beat their index over a 15-year period.

This means that by simply investing in “average” index funds and just standing there, you will outperform nearly every single investor over time. Even those on Wall Street. Not bad for average.

It’s not sexy, it probably won’t make for very interesting dinner conversation, – it just works.

But if you need to get stock picking out of your system, I won’t try to stop you. I understand the thrill of picking a stock that goes up in value. It’s exhilarating. It’s addicting. It’s very much like gambling.

If you decide to play this game and trade stocks (or cryptocurrency, etc.) do me a favor and call it a play fund. And never let this play fund make up more than 5% of your total investment portfolio. Go to town, up to that limit, if you so desire.

Had I not followed that rule, my stupid mistakes would have been deadly.

So there you have it – part two. I wish I could say that was it. That there are no more financial skeletons in my closet.

Not. Even. Close.