A Fool and His Money are Soon Parted

Posted by dfederman on May 27, 2011 in Market News | Comments Off

Outline by Dan Federman, CFP^®

“It is said that only a fool learns from his own mistakes, a wise man from the mistakes of others.” – Otto von Bismarck (1815-1898) Prussian German statesman and aristocrat.

“From the errors of others a wise man corrects his own.” -Publilius Syrus (1st Centry BC-?) Roman writer and poet.

“Experience: that most brutal of teachers. But you learn, my God do you learn.” -  C.S. Lewis quotes

“Experience is the name we give to our past mistakes” – Oscar Wilde quotes

“Good judgment comes from experience. Experience comes from bad judgment.” -     Unknown

Below are some investment and financial mistakes we’ve seen people make. Let’s be wise and learn from others’ mistakes!

1. PROCRASTINATION
   1. Save Early. Save Often.
   2. If you have Assets to Protect or Income to Replace in the event of catastrophes, get properly insured while you can.
   3. ACTING OUT OF GREED (TRYING TO GET RICH QUICK)
      1. Buying an “Investment Tip”
         1. i.      Listening to a friend, coworker, family member who tells you a stock is going to “double in six months.”
2. Buying a “Good Story” without considering risks or fundamentals
   1. i.      ex. “alternative energies” – makes sense, but businesses such as ethanol, electric cars,etc. may not be profitable for a very long time.
   2. ii.      Funds designed to double the performance of a particular market sector do not work.
3. Listening to Fortune Tellers
   1. i.      Many newsletter writers who sell subscriptions attract “sheepish” investors looking for the Promised Land.
   2. ii.      No one has a Crystal Ball
   3. iii.      Predicting the Future is Speculative
   4. iv.      Past Performance is not Indicative of Future Results
   5. v.      Ask yourself, “who is on the other side of this trade, why do you know more than they do and is this a fair price?” If there are many willing buyers and sellers, by definition, it is a fair price. (source: IFA.com)
4. Making Enormous Concentrated Bets.
   1. i.      Ex. betting big on energy stocks, Gold, Tech Stocks, Real Estate, etc.
   2. ii.      Over-concentrating in employer stocks.
5. Seeking High Yields on Cash or Other Investments
   1. i.      High yield = high risk
6. Investing in Fads.
   1. i.      Ex. Green energy, dotcoms, social media
   2. ACTING OUT OF FEAR
      1. “Catastrophisizing” – believing today’s disaster will continue indefinitely into the future.
      2. Basing investment decisions on daily headlines in the media.
         1. i.      Turn off the TV
         2. ii.      Don’t open your statements during bear markets (but check with an advisor to see if you are properly diversified in the first place)
7. Buying bear market funds or shorting stocks, attempting to capitalize from a downturn in the markets.
8. ACTING OUT OF EMOTION
   1. Buying in a state of euphoria and selling in a panic and leads to “buying high and selling low.”
   2. ATTEMPTING TO TIME THE MARKET.
      1. “Let’s wait it out until things get better”
      2. “Let’s take profits and buy on the next dip.”
      3. FAILURE TO HAVE A POSITIVE ATTITUDE ABOUT THE FUTURE.
      4. USING ASSETS TO GO INTO DEBT
         1. Buying Investments on Margin
            1. i.      Using stocks as collateral to borrow money = Bad Idea.  If the investments (or the overall market) turns south, you may be forced to sell at the worst possible time.
9. Using your home as an ATM
10. FAILURE TO MAXIMIZE RETIREMENT CONTRIBUTIONS
    1. Many people only contribute to their 401k plans at work if their employer contributes. We live in a society of shrinking pensions and social security benefits. Take full advantage of your company retirement plan.
    2. FAILING TO THINK LONG-TERM
       1. Time is your best ally when it comes to investing.
       2. If you need the money in 3 years or less, it should not be at risk in the stock market or in any “short-term trades.”
       3. FAILURE TO INVEST WITHIN THE CONTEXT OF AN ASSET ALLOCATION OR INVESTMENT POLICY STATEMENT (IPS)
          1. Compartmentalizing investments – viewing one investment at a time rather than taking a comprehensive view of your entire financial situation.
          2. Thinking “big is better” –placing investments only in “large blue chip companies” – Enron, Fannie Mae, AIG, Merrill Lynch, AIG, General Motors, etc. were all big blue chips before their stocks tanked.
          3. Investing in “dividend paying stocks” (ignoring all other asset classes available)
          4. FAILURE TO PUT YOURSELF FIRST
             1. If you have to make the choice, fund your retirement before funding your children’s college expenses. When you reach retirement age and are no longer working, you do not have the luxury of being able to save. Instead, you are taking distributions from your savings.
             2. FAILING TO PLAN FOR THE WORST CASE SCENARIO
                1. Failing to have adequate cash reserves for emergencies.
                2. Failing to set up an Estate Plan which
                   1. i.      Authorizes people to handle your affairs if you no longer can because of illness of disability (Financial and Health Care Powers of Attorney)
                   2. ii.      Specifies who gets what after you pass away (Wills, Trusts)
                   3. iii.      Provides for children who are minors or who have special needs. (Insurance, Trusts)
                   4. iv.      Minimizes estate taxes (ex. Credit Shelter Trusts, gifting strategies)
                   5. TAKING UNNECESSARY PENALTIES
                      1. Required Minimum Distributions (RMDs) – if you fail to take out the required distribution amount, the penalty is 50%!
                      2. Taking a non-qualified IRA distribution prior to age 59 ½ results in a 10% penalty and paying income taxes.

What have been some of your personal investment or financial blunders?

If you need to review your portfolio or personal financial situation, please feel free to contact us 1-800-808-7488 x101, visit us at www.aribaasset.com, or read our blog www.2020insight.com.