In the face of this year’s global upheaval and enormous financial challenges, it is common for many investors, homeowners, consumers and savers to misstep, throwing off their journey toward financial security. Bottom Line Personal asked several financial advisers for examples of those mistakes and the lessons learned…
The investor who never got back into the market. A 55-year-old engineer in California called me this past March after the stock market had plunged 34%. It turns out that he had liquidated all of his retirement portfolio in 2008 during the bear market and had left the entire amount—$1.5 million—sitting in a money-market fund for 12 years, much of the time earning near-zero interest. He missed the longest bull market in history waiting for the perfect moment to get back in. Now he was wondering whether that time had come. “I’m 100% in cash,” he said to me. “I think it’s finally the right time to invest.” I suggested that he start to slowly get back in the market and sent him the paperwork. Then…radio silence. When I finally reached him weeks later, he said, “I’m sorry. I can’t do it. I think the market could fall even more.” From late March through October 1, the S&P 500 rose about 50%, potentially costing him tens of thousands of dollars in lost profits.
Lesson: Most long-term investors should stay the course through market downturns because it’s easier and less stressful than the alternative. When you try to time the market and sell, it provides a temporary sense of relief by ending your pain and uncertainty. But you wind up having to make a second decision about when to reinvest your cash that can be excruciatingly difficult and paralyzing. If you do sell, make sure that you have a clear re-entry plan. Decide that if the market starts to rise again, you will “dollar-cost-average,” investing equal amounts of your overall investment monthly over a six- or 12-month period.
Kimberly Foss, CFP, is president of Empyrion Wealth Management, Roseville, California, and author of Wealthy by Design: A 5-Step Plan for Financial Security. EmpyrionWealth.com
A badly timed retirement distribution. An executive in his late 40s in New York City lost his job during the recession this year and found himself in debt. When Congress passed the CARES Act, allowing penalty-free early distributions from retirement accounts for those affected by the coronavirus fallout, tapping his 401(k) seemed like a convenient solution. The new law allowed him to avoid taxes on the distribution if he returned the money to his 401(k) within three years. He figured that he would have a new job soon, so he took the maximum allowable distribution, figuring that he was getting a tax-free, interest-free loan without compromising his retirement planning too much. He didn’t even consider other solutions such as negotiating his debts with his credit card providers or cutting back his lifestyle expenses. Unfortunately, the man’s financial situation declined precipitously. Within months, he had to declare bankruptcy. Not only did the bankruptcy court take what was left of his distribution to partially pay off his creditors, but he still faces a potential tax liability on the 401(k) money he withdrew.
Lesson: Your 401(k)s and IRAs have advantages beyond just tax-deferred appreciation. The assets in those accounts generally are protected by federal law from creditors in bankruptcy proceedings. (See “Is Your Retirement Account Safe from Creditors?” at BottomLineInc.com for more information.) That’s one reason tapping these accounts early continues to be a bad idea, despite efforts by Congress to make it easier and less painful this year. Early distributions should not be treated casually and should be used only as a last resort.
Ed Slott, CPA, is president of Ed Slott and Company, LLC, a financial consulting firm specializing in IRAs and retirement planning, Rockville Centre, New York. IRAHelp.com
A pricey vacation home bought out of fear and boredom. A 40-year-old consultant spent months stuck inside his house in Dallas during the pandemic. Living in a big, crowded city with little to do increasingly felt like it was no longer worth the health risk. He wanted an escape and bought a cabin in Colorado, where his family liked to go on ski vacations. Real estate prices there were shooting up because so many urbanites had the same need for safety and outdoor amenities. In fact, the cabin cost nearly as much as his large home in Dallas. While he did feel better owning a get-away home, the realities of maintaining a second residence in another state quickly became a burden. He had to furnish the cabin, oversee renovations and repairs, and work longer hours to cover two mortgages, making it harder for him to enjoy it.
Lesson: If you’re compelled to make an emotional purchase, choose a small one that doesn’t carry long-term consequences. Drop a few thousand bucks on a Peloton bike…or splurge on a luxury ski or hiking vacation in the mountains. The pandemic is not a permanent situation and certainly not the setting to make big financial decisions. Five years from now, those of us who simply hunkered down and saved and spent conservatively this year will be a lot happier.
Charles Sizemore, CFA, is chief investment officer of Sizemore Capital Management, Dallas, and coauthor of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy. SizemoreCapital.com
The senior citizen who preferred paper over digital transactions. An 80-year-old woman in Westchester County, New York, resisted all of her family’s efforts to help her use her computer and iPhone to manage her personal finances. She was no Luddite. She loved communicating via FaceTime with her grandkids. She just felt more comfortable and confident paying bills and filing taxes the old-fashioned way. This year, however, those habits made her personal finances increasingly difficult to manage, creating plenty of anxiety and late fees. What happened: The woman had always sent her federal taxes to the IRS via paper return and received a physical refund check. Amid the pandemic, it took several months longer this year to receive both her refund and her $1,200 federal stimulus check than it took her friends who were already set up for direct deposit with the IRS and received their stimulus money electronically. In addition, drastic cost-saving measures by the US Postal Service slowed the delivery of mail, so she paid numerous late fees for bills that she thought she had mailed in plenty of time to make the payment deadline.
Lesson: People should stop clinging to paper. Sure, it’s nice to see your favorite teller at the bank, and there’s a certain learning curve and distrust of electronic bill payment. But digitizing your personal finances offers two critical advantages—it is more efficient and much easier to organize documents, retrieve them and pay bills…and it allows family members you trust to help oversee or participate in your financial life.
The man who mimicked the moves of stock market geniuses. A 50-year-old engineer from New Jersey loved driving his Tesla electric car. After researching the company, he bought stock shares last year. In early 2020, he heard an interview with Charlie Munger, vice chairman of Berkshire Hathaway, who mentioned that he would never invest in Tesla. The engineer idolized Munger and Berkshire chairman Warren Buffett and wanted to emulate these giants. Reluctantly, he sold his stake in Tesla and reinvested the proceeds in four airline stocks (American, Delta, Southwest and United) that had been performing well in Berkshire’s portfolio. As the coronavirus pandemic crippled air travel, Buffett reported in May that he had liquidated his entire position in airline stocks. The engineer immediately followed suit, losing about half the value of his investment. Through the first nine months of the year, Tesla rose more than 400%. The four major airlines, despite a summer rebound, fell between 27% and 59%.
Lesson: Adapt the principles of brilliant, well-known stock market investors to your financial profile instead of copying their moves. No matter how much you trust their skill and records, gurus may have different time horizons and risk tolerance than you. For example, Buffett had started loading up on airline stocks in 2016 and was sitting on huge gains. Also, copying the masters’ moves often means that you’re acting on outdated information because they routinely reveal their stock trades months after making them.
Edward Mendlowitz, CPA, ABV, PFS, is a partner at WithumSmith+Brown, PC, an audit, tax and investment advisory firm, East Brunswick, New Jersey. Withum.com