Everyone has made costly money mistakes at some point in his/her life—even shrewd financial experts who deal with money for a living. Bottom Line Personal spoke with five money mavens to find out their most unfortunate mistakes and what they learned that could be helpful for investors and consumers.
Mistake: I got caught up in a stock market craze even though I thought I knew better. Back in 1999, I got my own financial talk show on satellite TV. As a result, I had a front-row seat to what was making Internet stocks skyrocket in price because every day, people called in to our show to tell me how they were investing in companies such as Pets.com that were steadily losing money. Their reasoning? Mostly, they assumed that there must be something great about these companies because the stock prices kept climbing. As a former stockbroker, I considered myself way too financially savvy to get sucked in, but finally I couldn’t resist purchasing the stock of Pets.com and several other early Internet ventures—all of which turned out to be doomed. I lost big.
Lesson learned: Even if you are a well-educated investor, it’s extremely easy to be dazzled by a soaring stock price and assume that there must be hidden reasons why a company making little or no profit is attractive. To keep yourself grounded, you need to create a tangible reminder of your long-term objectives. Make a specific, written statement of your goals, asset allocation, risk tolerance and what you’ve decided you can and can’t do. Then refer to it whenever you’re tempted to make an irrational investment decision.
Source: Pam Krueger is CEO of Wealth Ramp.com, an online service that matches investors with registered financial advisers, and executive producer of MoneyTrack: Money for Life, which airs on PBS stations. PamKrueger.com
Mistake: I didn’t focus when it came to a big financial transaction, and the oversight could have put us on a rocky road. When my husband and I started our investment advisory firm and moved to lower Manhattan, an important client asked me to sell $20,000 worth of corporate bonds from his portfolio. I prized myself on multitasking and getting a lot done, so I called in the order to his brokerage firm while juggling other client accounts. The next day, my colleague wanted to know why the client had made a $2 million sale. I had mistakenly requested to sell 20,000 shares, not $20,000 worth of shares! Fortunately, the price of the bonds hadn’t moved. We were able to cover the transaction costs and unwind the trade without having any impact on the client’s portfolio.
Lesson learned: Slow down and triple check. Busy people prize being efficient, which means getting as much done as possible each day. But with vital money transactions, be a little inefficient. For example, instead of putting your credit card bill and other large bills on autopay so that they are paid directly from your bank account, actually handle the paper bill. Go through your credit card transactions each month. It takes a few extra minutes, but you may catch a lot of errors…and notice when companies quietly raise their monthly recurring charges.
Source: Karen C. Altfest, PhD, CFP, is a principal and executive vice president at Altfest Personal Wealth Management, an investment advisory firm overseeing $1.1 billion, New York City. She recently appeared on the Forbes magazine list of America’s Top 200 Women Advisors. Altfest.com
Mistake: I assumed that the more risk I took in the stock market, the higher the returns. When I was a business major in college, I took an $18,000 inheritance I had received from my grandmother and put 100% of it into hot, fast-growing stocks. I figured that I had such a long time horizon that I should be as aggressive as possible to get the best returns. However, many of the young companies I bet on went out of business. Within a few years, my inheritance was gone. Since then, I’ve never put more than 60% of my portfolio in stocks, and I’ve kept the rest in high-quality government bonds.
Lesson learned: Being conservative costs you much less in long-term portfolio performance than you think. Over a 40-year period, the Standard & Poor’s 500 stock index has returned 10.4% on an annualized basis. But a mix of 60% stocks and 40% short- and intermediate-term US Treasuries has returned an annualized 10% with only about half as much volatility. At any age, you need some exposure to lower-risk, dependable investments to preserve your capital.
Source: Jonathan D. Pond is president of Jonathan D. Pond, LLC, an investment advisory firm, Newton, Massachusetts. He is an Emmy Award–winning PBS TV financial host and author of Safe Money in Tough Times: Everything You Need to Know to Survive the Financial Crisis. JonathanPond.com
Mistake: I lost control over my home-renovation project by giving up control of the payments. My husband and I owned a house in Florida that we used as a rental property. A pipe burst in the bathroom, causing extensive flooding and $30,000 in damage—most of it, fortunately, covered by homeowner’s insurance. We were living out of state and quickly hired a Florida contractor to do water mitigation and replace wood and tile flooring. In our haste, our contractor got us to sign an assignment of benefits (AOB), meaning the contractor would be paid directly by our insurance company. That decision cost us several harrowing weeks holding our breath, hoping the repairs turned out OK. We hadn’t worked with the contractor in the past and suddenly had no leverage to withhold payment if we weren’t satisfied with the work.
Lesson learned: When you have work done that’s covered by insurance, always tell the insurance company that, if possible, you prefer any checks for the work be written to you. Likewise, don’t agree if a contractor asks you to have payments sent directly to him.
Source: Laura Adams is a senior insurance analyst at insuranceQuotes.com. She is based in Austin, Texas.
Mistake: I wanted to give financial help to a friend who was starting a business—but I didn’t think about the consequences to the relationship if the business failed. It was a longtime friend, and she had asked me to invest $50,000 in her custom tailor shop. I wrote her a check. The business survived for several years but didn’t really take off. The shop wound up closing. I never got my money back, and my friend moved away. Now here’s another admission—the same kind of thing has happened more than once to me! I do enjoy supporting my friends’ entrepreneurial ambitions, but ultimately I realized that my relationships with them would have survived just fine—and probably ended up better—if I hadn’t provided them with money for their businesses.
Lesson learned: It’s OK if you don’t give money to a family member or friend, especially if you think that person’s business idea isn’t viable or if the person would have to dramatically change his behavior or work ethic to make the business succeed. If you do give money for a business venture, decide on an amount that wouldn’t ruin the relationship if you lost it all.
Source: Janet M. Brown is president of the FundX Investment Group and managing editor of the NoLoad FundX newsletter, San Francisco. FundX.com