Beating Brexit with Investing 201: Two Elements We Can Control and Common Investment Mistakes

After seeing the news come in Thursday night last week and the resulting stock market crash on Friday, I found myself discussing Brexit and other macroeconomic factors during the weekend. This all inspired me to write my 2nd article on investing, where I’ll focus on elements of investing we can control & what we can do about large market events such as Brexit.

My first article on investing was everything any new investor would need to officially become an investor. The first lessons on investing were simple: remove productive procrastination, avoid analysis paralysis, and finally, buy low cost index funds at any point we have cash available to invest. A part of the advice was also discussing how timing the market is not as important as time in the market, as Warren Buffett would put it.

Investing 201: Two Elements We Can Control

When it comes to investing, there are two items we can control.

The 1st item is at the heart of what many personal bloggers (myself included) will rail against, and that is high fees.

When we purchase a mutual fund from an advisor, he might charge us X% based on his, “service fee,” in addition to the mutual fund charging us up to 2% (sometimes more) to hold our money. When it comes to fees, they can eat away at our portfolio at a staggering rate.

The diagram below demonstrates fees in the 0.25% to 1% range.

Investing 201: FeesSource:

Fees from the example I outlined above that range in the 2%+ range will further eat into the final investment amount by more than 50%.

The 2nd item might be more familiarly described as being frugal.

If we create a large gap between income and expenses, then we are left with a large amount of cash each month that will be put to work making more money for us. I love the feeling each month knowing that our portfolio is growing because we found easy 1% improvements to strengthen our financial lives.

This is what I mean when I tell people I am seeking to move away from being an employee as I transition to becoming an investor. It is another way of describing the pursuit of financial independence.

Of course, if you are in a position where money is tight, frugality might not offer you any comfort as every dollar is already being put to good use. This article will only help once you find yourself in a position with expendable income.

Investing 201: Beating Brexit & Other Common Investment Mistakes

My view on Brexit can be summarized by borrowing a quote from Charlie Munger, “Microeconomics is what we do, and macroeconomics is what we put up with.

Now that the micro elements were covered above, I can speak more to the larger macroeconomic events that will alter our net worth. Brexit was seen as highly improbable, even days before the event. This is not to say it was impossible, as is clearly evidenced by the results.

As I found myself watching a 3.65% market decline on Friday, I quickly tweeted out:

Brexit Tweet - Buy on Sale
While I do believe it was an excellent time to buy, I wanted to reiterate that ANY time we have cash available to invest, it is a great time to buy.

For me, I don’t necessarily have cash to invest, but I decided to put a few hundred dollars extra while committing to a slightly larger level of frugality over the next few weeks to make up the difference.

So while Friday evening may have seen stocks on “sale,” it is worth remembering, for practically all of January, February, most of March and even parts of May, the market was trading at levels BELOW the close on Friday.

If you’re like me and know people who allocated their portfolio into cash ahead of the Brexit decision only to then buy on Friday’s dip, then we can contribute their success to dumb luck over market awareness.

This creates a common mistake many investors face: becoming overconfident.

For the smaller investors, we can have a long streak of right calls over our lives, but it only takes a few large mistakes to demolish a portfolio.

The first line in my new “Start Here” page summarizes it all, “We don’t need to have a high IQ to become financially independent, we only need to avoid real stupid mistakes.”

Investing our money by making a prediction on Brexit is moving away from investing and into the realm of trading. We can make money there, but this new realm is more akin to gambling than anything else.

Trading on speculation is a different path to wealth altogether.

If we find success early in our career then it might be decades before the results are “averaged” out. It is often better to lose money in the market while we are young so that we can avoid such a fate when dealing with larger amounts closer to retirement.

Overconfidence early in our lives may lead to us to discover too late, that we placed all our eggs in the wrong basket.

Every investor needs to be aware of the effects overconfidence can have on their net worth.

On a personal level, I purchased Tesla shares at $119 and felt like a genius when they skyrocketed to $279 in a little over a year. A foolish version of myself may have bought much more while prices were high only to see them come crashing down again to the current price of $193.

This position is held in what I consider a “play fund,” that will never go beyond 5% of my overall asset allocation.

If you’re still itching to make those market predictions, then I will recommend you follow this approach and set yourself up with something small around 5% before making a larger commitment.

I have found myself wanting to try and time events such as Brexit or to buy more individual shares in various companies. When tempted, I remind myself that the tried and true method is to invest a piece of every paycheck into low-cost index funds from Vanguard while avoiding any decisions related to large macroeconomic events.

Have you been burned by a large financial mistake early in your career? Are you happy with index fund investing like we are? Do you prefer to trade ahead of macroeconomic events, such as Brexit?

Master Distiller

*Source for the featured image:

16 comments… add one
  • Martin - Get FIRE'd asap Jun 27, 2016, 5:17 am

    I attended the same investing classes as you. Great advice for the beginner investor as well as a timely reminder to those who may have been doing this for a while. Great post and well timed.

    • Distilled Dollar Jun 27, 2016, 6:43 am

      I was equally surprised to see many of my younger friends wanting to trade on the news, but it is hard to say if the damage is already done from an equity perspective. Either way, making a trade now would be speculation and my vote is to buy and hold during these stormy times.

  • Jon Jun 27, 2016, 6:59 am

    Nice article Matt. I definitely speculated some when I was younger and was lucky to never get burned. Now, with larger sums and greater experience in the market, I’m all about indexing and low fees!

    • Distilled Dollar Jun 27, 2016, 6:42 pm

      It is great to see you benefited from both having some gains when you were younger AND never being burned in the process. I’ve had too many friends lose months worth of their salary over an escalation into a position that they ultimately sold low.

  • The Green Swan Jun 27, 2016, 1:48 pm

    Great reminder, Matt. Brexit created uncertainty and volatility, but not an all-out market crash like that experienced in 2008 (and neither do I anticipate this to happen in the near term) and neither do I expect this to result in a recession. If you have a few extra bucks it may not hurt to throw it in the market now, but I would even consider waiting until some of the smoke clears. Either way, if you are a long term investor than Brexit shouldn’t bother you one way or the other. Thanks for the post!

    • Distilled Dollar Jun 27, 2016, 6:44 pm

      I agree. I think the markets net effect over last week was about 2% down with another 1.5% down today. That is a relatively quick pull back, but we’re still up from Feb/Mar. I do think volatility will be a concern for any traders out there, as Brexit continues to flood the market with short term news that might be good or bad.

  • Mr. PIE Jun 27, 2016, 1:55 pm

    Made too many mistakes to mention. Experience is what you get when you don’t get what you want. Still, done a few things right so it’s all give and take.

    Will probably add to our VTSAX position in a few days. Wouldn’t have done that 6-8 years ago when I was much less wise.

    • Distilled Dollar Jun 27, 2016, 6:50 pm

      I like that line, “experience is what you get when you don’t get what you want.” So true.

      Too bad we can’t learn everything from other people’s mistakes, all the time.

  • Apathy Ends Jun 27, 2016, 3:49 pm

    I don’t trade any events like this anymore, I traded earnings calls for awhile (gambled is a more accurate term)

    I am accelerating some buys in my Roth IRA, but I still think we have a ways to go down (my educated don’t listen or bet with me guess is we touch the 2 lows in the chart from the last year on the DOW)

    • Distilled Dollar Jun 27, 2016, 7:32 pm

      I love earning calls. I listen in to my favorite stocks each quarter. It is an unfiltered view from management which is always great.

      I’m trying to figure out quicker ways to accelerate our IRA contributions this year. I feel relatively confident we will be in a position to put our full contributions in Day 1 of 2017, but it might be a bit scary to place such a large amount in the market all on one day.

  • [email protected] Jun 27, 2016, 5:46 pm

    This is a great overview Matt. This is not an area where we have much experience – so we just keep it on autopilot in terms of investments. If it goes much lower, we might put some extra cash in – but we don’t try to time things at all. I appreciate all you have to share!

    • Distilled Dollar Jun 27, 2016, 7:33 pm

      Autopilot for investments and bills is the best route to go. If we automate as much as possible, then it leaves more time to pursue other activities/hobbies.

  • Rudy SMT Jun 27, 2016, 10:15 pm

    Hi Matt,

    Great article as always. You explain few points that are worth to be mention;

    ~ Better to do financial mistakes early in life than later
    ~ For the smaller investors, we can have a long streak of right calls over our lives, but it only takes a few large mistakes to demolish a portfolio.
    I would add to this point. Not only this sentence is wise for the investors but also for personal development.
    Example; Men which build successful carriers and on the end they blow it by doing some illegal activity and end up in jail.

    I personally invest after macroeconomic events, I found them more profitable and predictable.

    I’m going to share this article, excellent.

    • Distilled Dollar Jul 3, 2016, 3:55 pm

      Great point – not only can we eliminate the vast amount of wealth we accumulate with a large mistake, but we can even cross the line and do something unethical and illegal. That reminds me of the quote from Buffett, “A man can spend 20 years building a reputation, and destroy it in 5 minutes.”

  • Chris @ Sleepy Capital Jun 29, 2016, 10:40 am

    Matt –

    Thanks for the post, I really enjoyed reading it. I’m a believer in index investing for those who don’t make investing a strong focus in their life/career and therefore don’t have the insights or time necessary needed to invest successfully over the long-term. I agree wholeheartedly that investing on the “Brexit” turnout is speculating, and not investing. I liked your note about your 5% “play fund” where you invested in Tesla. For me, my entire portfolio is my “play fund” (using your term), but it’s much more than play for me. The interesting thing about investing as you found out with Tesla, it’s difficult to know what is “skill” and what is “luck”. You could make a very rational investment decision, but the stock can get cut in half due to the irrationality of the market, the line between skill and luck can be blurred. I believe consistent, conservative, rational buying decisions at opportunistic times in the market can lead to fruitful results. At my website Sleepy Capital, I focus on value investing and finding companies that are trading at a discount to what their intrinsic value would be based on a conservative calculation. For those who have a “play fund” that they are seeking to allocate their capital to individual common stock securities, my site is suited to ideas and topics related to that type of strategy (whether it’s a focus portfolio or 20+ securities).

    From a fellow Chicagoan, I really enjoy your posts. Thanks!

    Chris @ Sleepy Capital

    • Distilled Dollar Jul 3, 2016, 4:07 pm

      Great point – even if the fundamental analysis is accurate, you are still playing in a market that might be more impacted by emotion or external factors over the microeconomics of an individual business. It reminds me of a story a college professor told me where his friend shorted Amazon stock based on the extremely high PE ratios. He shorted the stock twice over a few years and lost all of his money, because the stock ultimately dropped about 6 months AFTER his last shorts expired (during the first dot com bust).

      Chicago +1 woo!

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