M1 Finance Investing Mistakes, 5 Investing Mistakes to Avoid

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M1 Finance is a wonderful platform for free long term investing. However, there are also pitfalls of this platform that you must understand. In this article, I would like to point out some of the common M1 Finance investing mistakes.

M1 Finance brokerage is not intended for those who would like to day trade (buying and selling multiple times throughout the day). M1 Finance is not optimal for single stock pickers unless you are creating a basket of stocks to diversify while allocating a small percentage to each (this becomes more like a self-created ETF).

You cannot time your purchases with M1 Finance, and they only provide one trading window for free members and two trading windows for premium members. However, to use both of the trading windows as a premium member, you must have at least $25,000 in your portfolio.

When I was a newbie to M1 Finance, I have committed many mistakes, which allowed me to learn and become a knowledgable investor over time.

1. Putting All of Your Eggs in One Basket

When my wife Lakshmi and I started investing, I have allocated the majority of her IRA or retirement portfolios to ETF’s. I, on the other hand, decided to invest in a single stock within my Roth IRA (I Know! I was out of my mind). Over the year, I have watched her portfolio appreciate while I spend most of my time continually averaging down. No matter how much you think you know a company, there are external factors that are out of your control.

American Multinational Cinema (AMC) was my only holding in M1 Finance when I first started investing. I was down close to 18 percent on (AMC) stock. Although it recovered after a few months, I could have avoided unwanted stress by diversifying my portfolio.

M1 Finance investing Mistakes

In my case, I was lucky that (AMC) stock pays a 20 cent dividend and yield 8 percent or more. My money was at least earning interest while I waited. Someone can be in a much worse situation by putting all of their money in one basket as I did, especially if the stock pays no dividend.

This is why they say, “don’t fall in love with a stock,” folks! I guess you live and learn!

Here is my wife’s portfolio around the same time just to compare, I had all of her money diversified into the Total Stock Market, International Market, Real Estate & Bonds.

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There is no stress involved with a diversified portfolio, and diversification cuts risk.

How Does Under Diversification Relate to M1 Finance?

You shouldn’t be putting all of your money in a single stock no matter what brokerage you use, but it is especially true for M1 Finance.

Putting all of your eggs in one basket using M1 Finance can have detrimental consequences because you are not able to sell and get out of the position whenever you want. If you are lucky and have not allocated your entire account balance to a single stock, you may be able to average your way out.

You are also not able to get out of the position at the highest price possible because you are at the mercy of the M1 Finance trading window.

2. Filtering Out Short-Term Noise

The stock market is never linear, and it will fluctuate continually depending on negative or positive headlines, politics, job market, bond market, etc. As an investor, you should learn to filter out these noises and focus on long term results.

An analogy I often use for the stock market is as follows:

Try to see the stock market as a dog that you are taking for a walk, you may be walking a straight path, but your dog can go up, down, sideways, etc. No matter how you try to control your dog, your dog will kind of want to do its own thing. The stock market is just like the dog in this analogy, and it doesn’t just go straight up or straight down.

(Credit for this analogy goes to Joseph Carlson who is a Financial/dividend investor & YouTuber)

Once you filter out the noise and keep your cool, the stock market can be a rewarding and stress-free experience.

How Does Short-term Noise Relate to M1 Finance?

It is easy to filter out short-term noise with M1 Finance if you diversify and allocate your holdings into different sectors or pies.

Let’s say you have all of your real estate holdings in a single M1 pie, and the real estate market is facing some tough times. Because you diversified your holdings within that pie, you can stay calm and average down on that entire real estate pie without losing your cool.

Your future monetary contributions will automatically invest in the most underweighted stock holdings in that pie. From past stock market downturns, we can see that the market always manages to recovery eventually.

3. Blindly Investing in Companies

Do not blindly invest in companies without doing your research on the company. Do not fall in love with a company, no matter how much you love their products.

Look at General Electric (GE), for example, a company that was a household name in America once. 

General Electric is currently trading at 7-11 dollars a share down from its high of 31 dollars in 2016. If you blindly followed the crowd and bought shares of GE in 2016, you are down somewhere around 60 to 62 percent today. General Electric even went ahead and cut their dividend to a penny. 

Although General Electric is going through some pain right now, I predict General Electric will return to profitability shortly.

Keep your eyes and ears open while investing. If a company’s financials do not sound right, be ready to cut your position. If a company is cutting its dividend, then that means they are likely under financial stress. 

Do not blindly invest in companies where their balance sheet continues to depreciate year over year. Read up on their revenue, cash flow, and debt levels. Yahoo Finance is a great website that I found to be more accurate when it comes to reporting the financials of companies.

How Does Blind Investing Relate to M1 Finance?

M1 Finance makes it extremely easy to slap on a bunch of companies into a pie for passive investing. A lot of “expert pies” are even created for you without understanding your investing horizon. 

You may be a dividend investor where someone else may be a growth investor. Do not merely ask online or follow your friends when it is time to put together a portfolio; everyone has a different timeline than you and even may have a better cost basis in individual stocks.

 It is best to do your research on the companies that you would like to invest in and put together a portfolio yourself.

Be ready to follow the holdings in your portfolio religiously and keep up to date on company news. Seeking Alpha is an excellent website that we use to get news alerts about our stock holdings.

4. Investing All at Once

Putting all of your money in investments at one time can be a good thing according to some people and wrong according to others. The invested capital is already working for you, whereas the money you are holding is not.

I guess it all depends on how much money you have and what you are investing in. I find that it is better to invest your money slowly over time in a volatile market because you can get some of the best deals that way.

When you are confident that the market conditions are too volatile, keep some cash on hand for bargains. Even Warren Buffet is currently saving some cash on the side as he is predicting a correction in the market very soon.

In my wife’s traditional IRA mentioned earlier in the article, I was able to buy during the downturns in the market that happened around May 2019, which worked great for us because the market was up six percent the month prior. So you can see how keeping some cash on hand can be beneficial.

How Does Investing all at Once Relate to M1 Finance?

M1 Finance makes it extremely easy to invest slowly and consistently by allowing you to buy fractional shares. As long as you have 10 dollars or more in cash available, you can purchase fractional shares slowly and on every market down days. I usually increase my bond pie in M1 when I feel the equity market is too expensive and buy the total stock market or international market when equities are down. You can also just buy the whole portfolio and M1 will automatically allocate for you.

5. Over Diversification

If you are a dividend investor like myself, you want to diversify but not over diversify. You will see your dividend income grow quicker concentrated into a smaller number of high-quality stocks. You will also be able to monitor and manage the companies better.

People have different opinions on how many stocks one should hold, but I would say somewhere around 40 is reasonable. However, they need to be in varied sectors such as real estate, health, industrial, technology, etc. It is also a good idea to hold 10 percent of your portfolio in bonds if you are young. You should hold 20 percent in bonds if you are closer to retirement.

How Does Over Diversification Relate to M1 Finance?

M1 Finance makes it extremely easy to over diversify your portfolio with up to 100 holdings in a single pie! Although it is tempting to do so, please take into consideration the points I mentioned above. You can attain an excellent dividend or growth portfolio without holding too many companies. Diversifying your stock holdings into multiple sectors is more critical.

Do We Recommend M1 Finance?

Yes, we highly recommend M1 Finance but only for long term investing. My wife and I are big fans of M1 finance. We love the intuitive and eye-catching ways to split your portfolio into pies, zero trading fees, and the ability to buy fractional shares.

Hopefully, you were able to avoid some of the M1 Finance investing mistakes that we made and this article was helpful to you.

If you are interested in investing in our well-diversified retirement pie, please follow the link below.

If you end up signing up for M1 Finance using our link, we will both receive $10 dollars in our accounts.

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