In my years in the business, I’ve seen some bright people make some really silly money decisions. I can probably write a small book if I included all the mistakes I’ve witnessed!
I call them silly mistakes. I use the word “silly” because it’s taken more lightly. I can probably swap the words to read dumb mistakes or stupid mistakes, but I am not here to verbally beat anyone up!
I wanted to share a 6-pack of miscues that I see occurring the most:
1. Getting caught up in the hype. I remember Mark Twain’s famous quote resurfacing on headlines in the mid-2000s “Buy Land, They Ain’t Making Any More Of It.” People, including myself, bought in to it and rushed out to buy as much as we could. The banking crisis that came in 2007-08 made us all look like fools. How about bitcoin? Marijuana. Tech. Gold. Whatever the topic du jour discussed at the company water cooler, it’s often best to not get caught up in it. I’m not saying these areas are not worth your time, but it’s usually not best to act on hot tips, stories, or gamble on the latest topic trending on twitter. Avoid the hoard mentality and you’ll thank me later.
2. Trying to time the market. I don’t believe in market timing and am not sure there is anyone out there who can consistently and accurately do it. So, why try? I suppose if one can figure out how to do it, they will become an insta-millionaire. Or become poor trying. Studies have shown that this market timing phenomenon has resulted in more market under-performance than any other strategy.
3. Trying to pick stocks. It happens to be best of us. We read or listen to someone who is pitching a stock, or a recent IPO, and think “I need some of that!”. It’s like legalized gambling. The lesson here is that stock picking is very difficult, and should be left to those few who have the time and expertise to do so (and even then, they have issues doing it consistently). I agree that most long term investors should have “stocks” in their portfolio, but would be much better served owning it in the form of a fund…aka a basket of stocks.
Of course when we are in the midst of a bull market, most stocks rise with the tide and give the false impression that anyone can pick stock and make money. Don’t be fooled, as the old proverb says, “A smooth sea never made a skilled sailor”.
4. Investing without a plan. Ever plan a trip without mapping out how you are going to get there? That’s a simplistic example, but your financial future is much more important and needs a roadmap. I often cite studies which show how people who have written investment plans are exponentially more successful than those who do not. Do yourself a favor and don’t dive in without some direction. Be smart, know what you are getting in to, and have a plan.
5. Focusing too much on taxes. Out of all these mistakes, this one (potentially) has the most merit. I too often see someone NOT wanting to sell an investment because of the capital gains tax. It’s understandable that taxes can be a deterrent, but it shouldn’t be at the sake of making an uninformed decision.
Here’s the thing…
If I am going to recommend someone sell an investment it’s because I believe it’s in their best interest. There are usually other factors that take priority. It could be diversification purposes. It could be for risk control. Most times, the benefits of selling more than outweigh the tax owed. Too many times I’ve seen people HOLD something far too long, all because they wanted to avoid paying Uncle Sam. Often times this is a mistake.
6. Not seeking qualified help. I’m not going to sit here and tell you this is rocket science. But if you do not have the time, expertise, and willingness to manage your finances (you need ALL THREE) then then seek out help. With only 17% of Americans using a financial advisor I think many are shooting themselves in the foot.
Here’s just one resource that can help – an e-book I wrote on the topic. I cover what to look for in chosen someone to partner with. I always recommend working with a Certified Financial Planner, some with experience, and someone who is fee-based. It wouldn’t hurt to look them up and make sure they have a clean history (FINRA BrokerCheck).
In summary, I’d say that people would be more successful and enjoy the investment process more if they just learned how to avoid these common miscues. Steer clear of these potholes and your journey down the road towards financial freedom should be much smoother.