Editor’s note: Related tickers: Netflix, Inc. (NASDAQ:NFLX)
I’ve made my fair share of bad trades over the years. But with every poor decision I’ve made, I’ve seen it as an opportunity to learn something.
The following is a list of the three worst investment decisions I’ve ever had the misfortune of making, and the resulting lessons I took away from them. Hopefully, readers can avoid making these mistakes for themselves.
Holding leveraged ETFs
A leveraged ETF is a very dangerous thing. While it’s hard to beat the potential returns they offer, the downside can be just as swift and severe.
It’s important for investors to understand that, over a long period of time, leveraged ETFs become worthless. Not every leveraged ETF works the same, but the leverage employed comes at a cost. Like any loan, there’s interest that must be paid.
The cost of maintaining that leverage is ultimately borne by the fund’s holders. Although these funds can have powerful, short-term rallies, in the long run, the cost of maintaining that leverage eats away at the value of shares.
For example, shares of the Direxion Daily Financial Bear 3X Share (NYSEMKT:FAZ) are down nearly 90% in the last five years.
Holding these ETFs for a few minutes, a few hours — even a few sessions — may make sense. While Direxion Daily Financial Bear 3X Share (NYSEMKT:FAZ) is down over the last five year, it staged a powerful rally last September, gaining more than 10% in the span of only a few sessions.
Because they can bounce back so quickly, a trader who has lost money can easily fall into the trap of trying to hold them for “just one more session” in the hopes of making their money back. But the longer you hold them, the more the odds are against you.
If you’re going to trade funds like Direxion Daily Financial Bear 3X Share (NYSEMKT:FAZ), set a strict timetable and follow it.
Shorting Netflix ahead of earnings
Probably the worst individual stock mistake I’ve made was a relatively recent event. Specifically, I shorted Netflix, Inc. (NASDAQ:NFLX) ahead of its earnings in January.
Going into the trade, I was operating under the assumption that Netflix, Inc. (NASDAQ:NFLX) was overvalued. The price-to-earnings ratio was over 300 — many times more expensive than the market.