Thoughts and observations for those investing on their own or contemplating doing it themselves.
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Tuesday, May 31, 2011
Biggest Money Mistakes
I am an advocate for do-it-yourselfers. But not for those who do not know, or refuse to learn, the basics.
Some true life stories from "Financially Fit" on money mistakes;
1. Bought vacation home as an investment.
2. Too much money in employer stock.
3. Trusted pro picks and ignored fees.
4. Too risk averse for age.
5. Short-term savings in growth stock.
These mistakes are simple, but very costly, errors people make over and over and are easily preventable. A weekend reading a good investment book (for example, The Elements of Investing by Malkiel and Ellis)
would prevent most of them. No. 1 and 2, for example, are diversification issues. #3 is one that is hammered home by this site and the aforementioned book. The bottom line is most pros will underperform over the longer term and fees will eat up a nest egg. #4 is about asset allocation. The most important consideration in deriving an appropriate asset allocation is age. #5 is covered by a very simple, basic rule - if you need the money within 5 years, keep it in cash equivalents or near cash equivalents.
Again, these are errors that shouldn't be made. They are like drinking too much and driving, skating on thin ice, or driving and texting. Really, you just have to scratch your head and wonder.
To be sure, there are more difficult issues in finance. For example, how to determine the upper limit on student debt to take on in pursuing a college education or the appropriate withdrawal rate in retirement. The mistakes described above aren't in this category.
A short time ago, there was a story in the local paper about a do-it-yourselfer who attempted to hook up a gas dryer. He blew his house to smithereens and killed his wife. Please: if you are not sure what you are doing investment-wise, spend an hour with an investment professional. Avoid the silly mistakes.
Posted by Robert Wasilewski at 6:59 AM
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Education is the key! There are some many pitfalls to avoid and its your money at stake!ReplyDelete
(I'm guilty of a few myself!)
One wonders how obvious mistakes like those listed above still find their way into people's lives!ReplyDelete
where's the common sense?
re: MoneyCone I agree 100%. I would add to the list above that people sign major financial instruments that they don't understand and they need to ask questions until they understand them. Specifically things like adjustable rate mortgages etc.ReplyDelete
re: Mich Apparently "common sense" is pretty uncommon.