Investing tips and fundamentals to be aware of

Investing for beginners: Part 7 of 8

All of the information in this beginner investing series so far is to help get started with investing. This article will be a list of tips and additional information to hopefully prevent common mistakes and misunderstandings when beginners start investing.

Investment plan

The purpose of an investment plan is to lay out all your goals and make it clear how you’ll achieve them. It is also a great way to reduce the behavioural risk of tinkering with your portfolio. This can be done by justifying the choices you made for your portfolio and having conditions in place that you must satisfy if you want to make changes to it.

Read more about creating an investment plan here.

Chasing past performance

Impressive past performance is the siren’s call of investing. We can’t help but feel compelled to invest in high-performing funds, hoping such performance will continue into the future. Chasing past performance is one of the most common mistakes an investor can make that can lead to disappointing results.

Greenwood and Shleifer (2013) finds that investors are so bad at predicting future performance that their predictions tend to be the exact opposite of actual performance. This is because of mean reversion caused by valuations (Arnott et al., 2017) and being overly optimistic (Bordalo et al., 2022). When a fund had a great run of performance, the fund tends to have expensive valuations, indicating lower future returns. Those investors who attempt to chase this great past performance will likely be disappointed when the lower future expected returns materialises.

So when looking for funds to add to your portfolio, the past performance of the fund should not be a consideration. The cost of the fund (MER and taxes paid) is a much more reliable indicator of a fund’s long-term performance (Vidal et al., 2015). The fund’s objective and methodology can also be a consideration in the decision process.

Priced in

The term “priced in” is not commonly taught to beginners but has important implications for properly understanding how the stock market works and, in turn, making better investing decisions.

What the term means is that the market is forward-looking. For a given stock, all investors will arrive at a different opinion and expectation of how the stock should be priced based on available information, rumours, and trends. This leads to buying or selling a stock until the stock price reaches an equilibrium that reflects the combined expectations of all investors.

For example, with the recent hype around AI, retail investors have been flocking towards tech stocks to ride the potential boom when AI transforms the industry in the future. But as we now know, this expectation of AI has already been priced into the stock market. So if these retail investors want to profit, then tech stocks would need to exceed the expectations of the market. Not only that, but these retail investors are competing with institutional investors whose job it is to quickly get information about tech stocks and incorporate this information into the stock prices.

You may get lucky, but luck can only go so far. If an investor accepts that they don’t know more than what the market knows, then by definition, this investor should stick with the market portfolio.

I’d like to credit David Creekmore for writing this article that helped me write this section, and I also want to include the “Everything is priced in” reddit post that they linked below, as I found it too good not to include:

Don’t even ask the question. The answer is yes, it’s priced in. Think Amazon will beat the next earnings? That’s already been priced in. You work at the drive thru for Mickey D’s and found out that the burgers are made of human meat? Priced in. You think insiders don’t already know that? The market is an all powerful, all encompassing being that knows the very inner workings of your subconscious before you were even born. Your very existence was priced in decades ago when the market was valuing Standard Oil’s expected future earnings based on population growth that would lead to your birth, what age you would get a car, how many times you would drive your car every week, how many times you take the bus/train, etc. Anything you can think of has already been priced in, even the things you aren’t thinking of. You have no original thoughts. Your consciousness is just an illusion, a product of the omniscent market. Free will is a myth. The market sees all, knows all and will be there from the beginning of time until the end of the universe (the market has already priced in the heat death of the universe). So please, before you make a post on wsb asking whether AAPL has priced in earpods 11 sales or whatever, know that it has already been priced in and don’t ask such a dumb fucking question again.

Market timing

Many investors are tempted to time the market to earn an extra return or lessen the impact of a downturn by buying and/or selling at opportune times. This also includes holding cash and waiting for the right time to invest. But because of how unpredictable the stock market is, market timing tends to be a losing game on average.

If you try to save your cash in hopes of ‘buying the dip’, Felix and Warwick (2021) and Cao, Chong, and Villalon (2025) finds that this strategy tends to underperform simple buy-and-hold over the long term. If you try to wait to buy the dip when the market is at an all-time high, then you are likely to miss out on more returns, as All-Time Highs in the Stock Market are Usually Followed by More All-Time Highs.

This applies similarly if you have a large sum of cash, say $100K, and you’re wondering whether you should invest it in chunks or put it all in at once. Statistically, you are better off putting it all in at once, which Ben Felix explains in this five-minute video: Dollar Cost Averaging vs. Lump Sum Investing. If you are still hesitant of investing a lump sum, consider whether your portfolio is too risky for your risk tolerance. Quoting Ben Felix:

We also think that if a fear of loss is so great that DCA needs to be employed to make an asset allocation decision more palatable, that asset allocation may be too aggressive. It should feel comfortable to invest a lump sum in a risk-appropriate portfolio. We do not want to imply that DCA should never be employed, but we do believe that if it feels necessary to use DCA in order to implement an asset allocation decision, it may be wise to revisit the portfolio altogether.

It is generally always better to invest sooner rather than later. Investors should try internalising this fact and try their best to not listen to their intuition, market news, and ignore what the market is doing. In the words of Peter Lynch:

Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.

Dividends

Throughout this beginner investing series, I have not mentioned dividends at all. For those who don’t know what dividends are, they are money that companies pay out to their shareholders as a kind of reward for investing in their company. Now, the reason why I haven’t mentioned dividends is because, in the grand scheme of things, dividends are just a byproduct of investing. I’m not saying that dividends aren’t important, but it is a common beginner trap to buy companies that pay high dividends.

Why this is a trap is because receiving dividends is mathematically equivalent to selling shares (ignoring taxes), a fact known by academics since 1961 from Miller and Modigliani’s paper. When including taxes, it is more advantageous to sell shares and receive the 50% Capital Gains Tax (CGT) discount if shares were held for >1 year than to pay full tax on dividends. Dividends do not have any special properties that make them safer during downturns. It is no safer than selling shares during a downturn. Focusing on dividends also means a less diversified portfolio, which could hurt the performance of the portfolio.

There is more nuance to dividends that I haven’t explained here, but that is for a future article. The main takeaway is to be indifferent to dividends, neither for nor against them. What matters in the end is the total return, which is equal to the price return plus the income return.

For those interested, a thorough discussion on dividends can be found here. 

Evaluate how good an investment is from the process, not the outcome

It is very easy to make a conclusion that one investment is better than the other because it had performed better, but this is resulting bias.

Paraphrasing Larry Swedroe’s article on the topic, a novice poker player may be able to beat a professional poker player, even if the professional made the correct decision and the novice won because of luck rather than skill and knowledge. But it is the compounding of good decisions that make the professional win more than the novice over the long term. This can be applied to investing. Investors can be successful with bets in companies, sectors, countries, themes, or strategies, even if such bets have no academic-backing that they will continue to be successful over the long term, and vice versa.

Don’t evaluate the success of a strategy based on the result, evaluate based on whether you made a good decision at the time with the available information. Investors that make good decisions by using strategies supported by financial theory and evidence are more likely to do better over the long term than investors who fall for biases and make speculative decisions.

Conclusion

Good investing is deceptively unintuitive, and so I hope the tips above will further set you on the right path of sensible investing based on facts. The next article concludes this beginner investing series and points to areas that you can look into further: Next steps