Time & Money

The Worst Investing Mistakes: How to Avoid Them

There are times when we make the wrong investing decisions. Then there are times where you’re left shaking your head over why a client made a certain decision. These decisions, of course, can take a significant toll on a portfolio.

The particulars of these decisions might be different, but two common themes run through each: The lack of willingness to listen to sound advice and giving little thought to repercussions.

Riding Emotions

We all know emotions can guide decisions. When they take the driver’s seat, the results can be disastrous, undoing goals your client has worked toward for years.

A few years ago, Paul E. Lewis, a CFP, got to see that very thing with a client. Lewis, a 30-year veteran in the financial planning space, was counseling a client who was offered a buyout from his firm. “He was fairly young, early 50s, had a little non-qualified savings and a 401(k) and pension buyout in the range of $500,000, which was only about seven times his salary,” said Lewis.

Lewis counseled the client not to take the buyout. Lewis explained that if the client and his wife had continued to work, they would’ve been set to retire at 65 with little impact to their standard of living.

The client did not listen to that advice. The client took the buyout and his wife, who was a hair stylist, left her job to start an executive placement business. The funding for her new company was their retirement assets; they ended up taking on taxes and penalties to make their business idea a reality. Sadly, they never realized income from the venture.

“This couple depleted $500,000 in assets in 18 months to obtain a lifestyle they desired but could never afford,” said Lewis.

This financial misfortune came about because they allowed emotions to guide decision making instead of thinking through the results of such decisions. (There were also foolish purchases like a boat and new truck.) Lewis spoke with a mutual acquaintance several years later and learned that the client was back in the same field he started out in — construction — but he was doing work a rung or two below where he had been prior to the buyout, earning $35,000 per year.

Lure of Hot Stock Tips

There is something exciting about following a hot stock tip. We get a rush at the thought of a stock doubling or tripling in price while we sit back and watch our investment account balances go up. But more often than not, hot stock tips simply don’t pan out.

Erik Nicewarner, CFP, got to see a client follow what was considered a sure thing. Nicewarner’s client was cold called by a broker in the early 1990s who explained how The Walt Disney Co. (DIS) was going to take off once the company opened Euro Disney Resort (which today is called Disneyland Paris).

“He promptly invested a large five-figure sum in the stock because anything Disney had to be a sure bet,” Nicewarner said. Later, as Nicewarner’s client watched the European Disney struggle, he allowed himself to go on an emotional roller coaster and sold out at a loss two years later.

The result isn’t surprising; Nicewarner explained that the client didn’t think through his decision. “The client did not have a plan before he even considered the investment,” he said. Stock tips are fun to follow, but even supposedly sure bets can have a negative impact on a portfolio when they’re unplanned and emotion-driven.

Timing the Market

While there is some debate as to whether or not the market can be timed, many say that a long-term view to investing serves investors best.

Steve Wallman, founder of Folio Investing, explains how trying to time the market — or trying to predict the future direction of a market — can impact returns badly: “The average investor loses 2.5% each year buying and selling at the wrong time,” he said. “It adds up year after year. Timing the market, chasing winners, buying fads — it just doesn’t work.” Yet investors still think they can outsmart the market by trying to time it.

Over time, fees can also negatively a portfolio. According to the SEC, an annual fee of 1% vs. an annual fee of .25% over a 20-year span will reduce the value of a portfolio by $30,000 in a portfolio of $100,000. That may not seem like much, but when you look at larger portfolios and higher fees, the impact only gets worse.

The Bottom Line

No one is perfect when it comes to investing. We all make mistakes, and it’s an advisor’s job to encourage clients not to throw caution to the wind and listen to sound advice. Clients may not like it at the time, but listening to a good advisor’s advice can mean the difference between preserving and losing what they’ve worked so hard to build.

 

Source Investopedia

Tags

Anthony Ansong

Ceo - Ansong Holdings LLC Co-Founder & Editor Light Magazine Africa Author of Children Book Entrepreneur

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back to top button
Close
%d bloggers like this: