- Invest in yourself so you know what a good investment looks like
- Only invest in what you understand and don’t skip your due diligence
- Recognize when you need to adjust and make it happen
I did it. I bought a yield trap in 2022. That’s right. I knew better, but I still chased a high yield stock that turned out to be a yield trap and it burned me. I won’t get my expected Return on Investment (RoI) or my expected Return on Equity (RoE). Which trap did I fall for? I bought Annaly Capital Management (stock ticker NLY) for that sweet, sweet high yield monthly dividend payment and it was too good to be true. Fast forward to this year, they announced they were cutting their dividend which is when I first looked deeper into their business. That’s when I realized they have been on a downward trend for years. Once I looked beyond the yield, it was obvious. This week, I sold my position at a loss.
Why am I sharing this? Because it’s important to acknowledge that we’re human and the world of investing is a constantly evolving environment. Even if we spend all of our time learning and perfecting our craft, we sometimes get carried away and make mistakes. Most importantly, know that it’s ok. Chances are, if you’re taking the time to invest to build wealth, you’ll make a mistake too. If you’re making forward progress you’re still better off than most and I’m willing to bet you’ll be back on the path to success in no time. That begs the question though, how do we avoid making a major mistake we can’t recover from?
The first step, in my personal opinion, is to invest in yourself. If you don’t know what you’re doing and you’re putting money into something, it’s not investing, it’s gambling. You may get lucky. You may make money. But chances are you’ll get burned at some point. Every dollar you spend to increase your knowledge is well spent as you are your ticket to wealth creation. Just make sure you put whatever you learn into action.
The second step is to make sure you only invest in assets you understand. In my case, I bought NLY early on with very little due diligence. I listened to the various investment articles that praised the stock and its yield for “monthly dividend income” without understanding the business and what could impact it. I took what I tell others, and I didn’t apply it myself in this case and risked my investment. Stick to what you know and you’ll reduce the chances of making a bad decision.
The last step I’ll share is to make sure you aren’t afraid to adjust if you make a mistake. If you find yourself thinking “let’s see how this turns out” but the investment doesn’t fit in step 2, it’s probably not going to work out. I’m not saying that you should sell any investment that doesn’t look to be growing. You need to know if the asset you invested in fits whatever your goals are and that the asset will perform based on investments you’ve made in yourself to understand the asset. Make sure you can realize when an asset doesn’t fit and take appropriate action to rebalance your investments into areas you understand.
So what did I do next after realizing my mistake? My position in NLY wasn’t substantial as I spread my investments out to various sectors to reduce my perceived risk. I sold NLY at a loss and redirected that money into a consumer staples company that historically performed well during, and coming out of, recessions. I have it set to DRIP in my brokerage account and I look forward to not thinking about it again until later this year.
What investment traps have you encountered? What investments do you find are bringing you joy? Let us know on Facebook or in our free discord server.
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