This is a guest post by Randy Peterman — a software developer, husband and father living in Colorado. He runs a quirky personal finance blog called “Watch My Money Maker.”
In devastation I looked at my investment account – I had a remaining $13.28 cents in my trading account after selling out of yet another losing trade. I blew $5,000.00 of borrowed money very quickly in an attempt to day-trade stock options. Well, I shouldnât say that. âI blew it,â I did learn something â’ consider it an expensive education that should have cost me almost nothing. I didnât learn that I shouldnât invest; I learned how I shouldnât invest. I had learned of an investing method that promised excellent results if I would only master its techniques. Dumb as it was, it was a lesson learned through trial, but mostly error. You can avoid these errors and losing money the way I did.
There are various things that you need to understand about investing but in this article I want to focus on one: educate yourself beyond superficial knowledge to the point of fully grasping the type of investing youâre going to do. As Jeremy has stated recently in his article about risk, you need to understand what your risks are. I had no clue what the risks were in my investing strategy because I didnât have a solid, fully understood strategy. I had some principles that I sort of understood and five grand to burn through in emotion-based trading.
As you hear, read or learn about investing strategies make sure you understand fully what those strategies involve. In my case I didnât understand the way that the particular types of options I was trading worked in conjunction with their stocks. I didnât understand the pressures that would come with day trading (while working a full time job) and I also didnât understand the emotion of borrowed money. I wasnât investing on margin but with money borrowed from a relative. Furthermore the hair-brained investing scheme that I was attempting to use was great for analyzing past performance but had very little to offer in evaluating potential market direction.
One of the best ways to learn about an investing strategy is to employ that strategy, but not without taking out the risk. Thatâs right, you can take the all of the risk out of investing if youâre willing to do what is called paper trading. Some online trading sites will allow you to create fake transactions and map them with real stocks, mutual funds, options or trading mechanisms so that you can practice the trading or charting techniques without the risk of putting your real, hard earned money on the line. Had I taken this strategy of learning through paper trading without the risk and without risking money that was not my own. Paper trading may also give you time to build up a lump sum of investing money if youâve not got very much money in the short term. As with all investing advice youâll want to consult with a qualified professional, which I did not do. Risk is a given, its going to be in all of your investing opportunities, you just amplify it by not being educated about the risks and the strategies youâre using.
I was fortunate in that my relative forgave me the debt of the investment money because I had learned a very valuable lesson. I was fortunate because I did not get fired for trying to day trade at the office (Note to readers: Donât let the opportunity to make quick cash on the stock market impact your performance as an employee). I learned a valuable lesson and instead of staying devastated I was able to come out from the loss ready to tackle life as richer in knowledge. Learn from my mistake and learn to prevent your own â’ but donât ask to borrow $5,000.00 from me for an investment â’ I learned that lesson, too!
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Oh the pain! and its a pain I know only too well unfortunately. Still it is good to look on it as an 'Investment in your education' because you can be sure that next time you won't make the same mistakes again!
I'm still a green investor, and maybe I'm being naive, but I wouldn't say that index funds are always the only way to go. They do make up a good base for your portfolio, but you shouldn't be afraid of individual stocks. The volatility is much higher of course, but so is the chance for phenomenal gains that index funds will never see. Worth the risk in my book.
I think everyone loses some money when they first start investing. Eventually they will learn that they should simply index it and forget or they will constantly under perform. Check out www.assetplay.net for asset allocations that will most likely perform in the future.
@Llama Money: At the end of the post you'll note that the debt was forgiven.
@Adfecto: It was a relative who lent me the money and they were trying to help me learn to invest, but the investment scheme was a bad one and options far too risky for a new learner. I /thought/ I had learned the system, but I didn't practice on paper, which is why I mentioned it specifically in this post.
Thanks for the comments!
Ouch. I'm trying to figure out who was willing to give you a $5k loan without either a business plan or collateral (unless you used a credit card?). Margin accounts are asking for huge trouble for anyone but the most seasoned market players. Most people look before they leap and unfortunately it seems you dove headfirst into the shallow end of the pool. Thanks for sharing your mistake so that others can learn from it too.
I bet paying back that loan hurt like heck! It wouldn't have been bad if you paid it back out of your profits, but having nothing to show at the end sure had to hurt.
Hopefully you've kicked the day trading habit now?