Mistakes cost differently at different stages in life. Mistakes in your fifties don’t matter much because there is not much time left for them to compound. And by your fifties, you are likely seasoned enough to not allow mistakes to become catastrophic.
But mistakes in your twenties, when you are likely to be at the peak of Mt. Stupid, compound and they compound bigly against you. Psychologists David Dunning and Justin Krueger theorized the Dunning-Krueger effect (DKE) and it plays out exactly as shown in many domains of life, especially in investing.
A good example of the DKE in action is highlighted in this WSJ story published in November of 2024.
Since then, the Defiance ETF is down 99% and MicroStrategy shares are down 75%. The first “investment” is already worthless and the second one is on its way to becoming worthless. Not knowing his parents’ true financial picture, the hope is that this is not all the money they had.
Standard investment advice also says that you invest more aggressively in your twenties than in your fifties. I see it the other way around, especially if you have yet to figure out the true definition of aggressive. We have been living through nothing but good times and that is when we are likely to find ourselves at the peak of Mt. Stupid.
But bad economic times will come. They are required for a good capitalist system to function.
And when those times come, you don’t want to be anywhere near Mt. Stupid. That is where overconfident investors make costly mistakes. The consequences though extend far beyond the immediate losses as you also forfeit the opportunity to benefit from decades worth of compound growth. That cost can far exceed the cost of the original mistakes.
And it is not just with investing. Every decision you make in your twenties compounds. 401(k) decisions compound. HSA decisions compound. Where you live, where you work, how much you save, where you save, everything compounds. Getting those early decisions right can shave years off your path to financial independence. I have seen it happen more times than not.
Skipping over Mt. Stupid though is not easy. Some of it is circumstantial, like you may not be lucky enough to have lived through some good and some nasty market cycles. Yes, I count living through big, nasty bear markets as getting lucky, especially if you encounter them early in your career.
Plus financial literacy is nowhere near adequate and even that is circumstantial. I mean who in their right mind would want to study taxes and insurance and discount rates and time value of money unless they have to and that too in their twenties.
The unfortunate irony though with the Dunning-Krueger effect at play is that people with inflated perceptions of their own financial literacy are more likely to make mistakes and less inclined to seek financial advice. You need a baseline level of financial literacy to know what you don’t know.
More knowledgeable investors on the other hand are more likely to seek and benefit from financial advice.
So taking a flier on a stock won’t help. Investing in IPOs won’t help. Day trading options won’t help. What will help is investing in your career and taking the profits out of that career and making consistently good money decisions year in and year out.
Thank you for your time.
Cover image credit – Katrin Bolovtsova, Pexels