Make Sure You Know What You’re Investing In

How has a failure, or apparent failure, set you up for later success?

When I was first learning about exchange-traded funds (ETFs), I make a mistake that cost me a good chunk of my total nest egg. I wanted to move away from individual stocks, and I knew that ETFs were a good way to diversify. However, I didn’t really understand that not all ETFs are the same. In fact, there is a huge difference between low-cost passive index funds and high-cost actively managed funds. So, where did I go wrong, and what did I learn from it?

My Mistake

In February of 2021, in an attempt to diversify while chasing past performance, I invested about 20% of my total investments into 5 different ARK ETFs: ARKK, ARKG, ARKQ, ARKW, and ARKF. I believed that this would be safer than holding individual stocks because ETFs hold a basket of securities, and I thought that by holding 5 different ARK ETFs, I would increase my diversification. However, I neglected to actually check what stocks each ETF contained. I was just focusing on the ridiculously high performance of these ETFs up to the point I purchased them.

It turns out that most ARK ETFs hold many of the same stocks, so there is actually very little diversification from owning more than one. I found this out almost immediately after purchasing them, but by then it was too late. The ETFs went down pretty much right away. I decided to hold on to them to sell after they went back up. They were doing so well before, I reasoned, even though I knew they were high risk. However, that never happened. It turned out that I purchased them at the peak. Since then, these funds are down about 75%. Thankfully, I ended up selling after 5 months, when they were briefly rallying, so I only lost about 20% of my investment. They’ve gone down another 70% since then.

ARKK performance since 2021 showing when I bought and sold (source: Yahoo! Finance)

What Did I Learn?

This experience taught me a number of lessons:

  1. It’s important to research your investments before buying them. Know what you are getting into.
  2. Not all ETFs are the same.
    • Passive index funds track an index (basket of stocks or bonds) and have a low expense ratio. If you want cost-effective diversification, choose these.
    • Actively managed funds change investments regularly and cost more to hold. If you’re trying to beat the market, choose these, but keep in mind they rarely succeed.
  3. Don’t get blinded by past performance, as things can change at any moment.
  4. You don’t have to hold on to a bad performing investment. There is no guarantee of a recovery.
  5. Don’t put all of your money into one investment. Thankfully I only invested 20%, but that still cost me 4% of my total portfolio in a year the overall market was up 28%.

Don’t make my same mistakes. You don’t need to rush into an investment. Take the time to do the research before actually putting your money in.

I’m sure I’ll make more mistakes in the future, and this won’t be my only failure. However, I did learn quite a bit from this experience that has allowed me to better position my portfolio for success in the future.


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