Here Are My 3 Worst Investment Decisions (and How I Survived Them)

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Three is how many jaw-droppingly poor investment decisions a 20-something can make, given the money to experiment. Penny stocks, leveraged investments, and early 401(k) withdrawals formed the unholy trifecta, back when I barely knew a bank teller from a brokerage account.

Congrats! You're already three steps ahead of me, considering you're reading before leaping. I hope the following tales of woe paint a bloody picture of precisely what investment decisions to avoid (and how to survive when you make them anyway).

1. Bought a penny stock on a family recommendation

"So, my friend is running a company, and I'm investing. I have a good feeling about it." John looked at me, a knowing twinkle in his eye. What did he know that I didn't? It seemed risky, yeah, but this was different. He knew the founder. That had to count for something. I was in.

Months later, John returned. "Have you seen the stock?" I opened my investing app. Wow! I'd already earned returns, assuming I withdrew. But John was doubling down, so I did, too. Again -- what did he know that I didn't? The answer soon became apparent: nothing.

The stock's value tanked, as the vast majority of penny stocks do. I lost most of my investment. Worst of all, I realized I had zero insight into the company itself. Why did the stock tank? I didn't know. Was the company struggling? Not a clue. In short, I'd let familial ties replace due diligence.

The takeaway

Think twice before investing in companies you don't know on recommendations of friends and family. In hindsight, I'd never have blindly invested in the penny stock (a category I avoid) if the recommendation had come from a stranger, even if that stranger happened to "know" the company founder.

2. Leveraged investments for 25% of my portfolio

During the early-2020 stock market boom, I leveraged over a quarter of my investment portfolio. I'd been doing so well, I figured I might as well take advantage of low interest rates to buy stock on margin, boosting any returns. It worked great...until the stock market tanked.

My brokerage, Robinhood, hit me with multiple margin calls, forcing me to sell when I wanted to hold. I ended up losing thousands more than I would have had I leveraged a smaller portion of my portfolio or avoided investing on margin altogether.

The takeaway

Anticipate your stock portfolio falling by at least 75% and plan accordingly. The less margin you take out, the less likely you'll be forced to sell at the worst possible time. If you're a long-term stock picker like me, chances are, your portfolio will tank every 10 years, at least.

3. Withdrew from my 401(k) early to cover margin calls

One poor investment decision leads to another. I was so stressed from scrambling to repay my leveraged loans, I chose my 401(k) as the place to withdraw money. In hindsight, it would have been cheaper to sell stock in my taxable brokerage account.

My retirement broker, Fidelity, charged me a 10% early withdrawal fee for the privilege of withdrawing from my 401(k) before retirement. I lost over $1,000 to a single fee and forfeited tax benefits because I felt too stressed to calculate cost vs. benefits.

The takeaway

Prioritize withdrawing from a taxable brokerage. That way, you avoid paying huge fees on retirement account withdrawals. Holding individual stocks because you're worried about missing upside is timing the market. That's not how I invest; I don't time the market.

How I survived my three worst investment decisions

I survived all of my worst investment decisions because I started small and early:

• I invested less than $1,000 into the penny stock.
• I paid off my margin balance as fast as possible, reducing the downside.
• I was too early in my career to lose tens of thousands to an early withdrawal fee.

I'm glad I took the advice of experienced investors and started investing early. Doing so let me make mistakes without going into deep debt. I've learned from all my mistakes, so I don't regret making them.

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Anticipate learning hard lessons? Better to start early. You have less to lose.

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