4 investing mistakes ramp made and how you can learn from them
Today, Ramp Capital LLC is taking a trip down memory lane and highlighting several instances of bad investing choices, regrettable social media moments, and other follies that he’s learned from (and which you can learn from, too!).
We all make mistakes before becoming GOATs. So remember: Review twice; exercise once — the financial equivalent of “measure twice; cut once.” And also note — none of this is official investing advice, and you should consult a professional before taking any financial risks yourself.
Fat-Finger Error Warning!
Years ago, in the rush of executing an order before the market closed, I placed an order to purchase 10 shares of a stock I had been watching. In my haste, I had executed the order and realized that I had put in 100 shares instead of 10 — also known as a “fat-finger error.”
When I realized my mistake, I had a mini-panic attack. I had a margin account, which allowed me to buy more stock than my current cash available. Not fully knowing what to do, I placed a market order to quickly liquidate the position in after hours trading — taking only $150 on the fat-finger trade.
PAY ATTENTION, DUMBASS! Or, to put it more nicely, review twice, exercise once. Also, don’t trade after hours when the cash market is closed because the bid/ask spreads are wider and you won’t always get a good execution price.
Employer-Provided 401ks and Matching Contributions
It is estimated that approximately 51% of employers who offer a 401(k) also provide matching contributions.
My first employer after I graduated college offered a partial 401(k) match where they would match 50 cents on the dollar, up to 6% of an employee’s salary. This means if I was making $100,000 a year and contributed 6% ($6,000) to my 401(k), the employer would contribute an additional 3% ($3,000) on top.
My main focus after graduating college was to begin paying off my student loans — with less thought going towards contributing to my 401(k). While I wasn’t necessarily swimming in debt at the time, it was a mental hurdle that I had to overcome. Should I pay down my debt and start over with a clean slate before investing?
Looking back, I could have probably saved more money by maxing out my 401(k) to get the employer matching contribution, as it would have exceeded the amount of annual interest I paid on my debt. Always take the employer match if it is offered. There aren’t many free lunches in life, but this is one of them.
Once I started contributing a portion of my salary to my 401(k) and collecting the employer match, the next step was picking the right funds to match my risk profile. This is something I should have spent more time researching.
Employer-provided retirement benefits typically only allow a small selection of index or mutual funds, ranging from conservative to aggressive. I wish I would have been more aggressive when I was first starting out, but I allocated too much of my portfolio to bond funds.
Some financial advisors use the following formula to determine your asset allocation: 110 minus your age equals the percentage of your portfolio that should be invested in equities, while the rest should be in bonds.
So a 22-year-old fresh out of college should allocate approximately 90% to equities. And with the rise in crypto, many advisors are now modifying this portfolio allocation strategy to cater to the younger generation of digital investors.
Having a financial advisor would have helped me in both of these situations. While I realized my mistakes a few years too late, the damage was not too significant.
Now, I have a financial advisor to monitor my investments and this professional allows me to ask specific questions tailored to my portfolio. It’s critical that an advisor understands your risk tolerance and develops a sustainable plan to building wealth over the long term.
Beware Exotic Investment Instruments (Know What You Own)
In early 2018, I began trading the VelocityShares Daily Inverse VIX ST ETN (XIV). In essence, I was placing a bet that volatility would eventually recede after historically short-lived spikes of the iPath S&P 500 VIX ST Futures ETN (VXX).
What I wasn’t aware of were the risks associated with holding this ETN if there was a sustained spike in volatility.
The day after I made the purchase of XIV, it went down ~80-90%. What I and thousands of others failed to realize was that in the prospectus there is a provision that states if the VIX futures index that it tracks — VXX.IV — is up 80% in one day, they can shut down the ETN. And that’s exactly what happened. The ETN ended up having an acceleration event and eventually closed, leading to billions in losses and investors holding the bag.
Beware of exotic products such as inverse or leveraged ETNs. If you are going to get into these exotic investment instruments, you need to understand them fully and how they actually work. Or just avoid them completely and leave it to the experts.
Contribute to Your Roth IRA Every Year
Whether or not you have access to an employer-provided 401(k) doesn’t stop you from contributing to a Roth IRA every year. A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax- and penalty-free after age 59½ and once the account has been open for five years.
Once I paid off my debt and started dabbling in individual stocks, I was doing so in an individual account which exposed me to capital gains tax. My mistake was not starting a Roth IRA sooner.
The advantage of a Roth IRA is you can avoid paying capital gains tax on your investments. I paid tens of thousands in taxes over the years that I was trading in an individual taxable account… when I could have been making the exact same trades in a Roth IRA.
With the current annual limit contribution of $6,000, you can build up a nest egg pretty quickly that grows tax free.
You can start contributing to a Roth IRA at any age, as long as you have qualifying earned income. My recommendation is to start one as soon as you can, before opening any type of individual taxable account. You can still use a Roth IRA to trade individual stocks, and this is the type of account that I use regularly to make trades and avoid the tax hit every year.
My hope in writing this is that you can learn from my mistakes and maybe they can help you become a better investor. I highly recommend you consult a financial advisor who can help guide you down a path of financial freedom and can tailor to your specific investment needs.
And again: This is not official investment advice, and you shouldn’t invest more than you are willing to lose.