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In my office, I have an entire shelf devoted to books I’ve borrowed from the public library. One that I’ve been browsing recently is Ilyce R. Glink’s 100 Questions You Should Ask About Your Personal Finances. This book is structured as a series of questions and answers addressing personal finance concerns. It’s not bad.
In the appendix, Glink lists ten common personal finance mistakes. She writes:
There’s nothing wrong with making a mistake. It happens all the time. Even the “experts” make mistakes. But you’ll really have problems if you don’t learn from your mistakes, keep making the same ones over and over again.
Here is Glink’s list of money mistakes, including my comments on each:
- Procrastinating. The best time to make any sort of financial improvement is now. The best time to start paying off your debt is now. The best time to start saving for retirement is now. The best time to start a budget is now. Mathematically, psychologically, and financially, the best time to start is now. Put compound returns to work for you.
- Spending more than you earn. Yes, the government deficit spends. You are not the government. Yes, there are lots of things that are tempting to buy. Yes, you could use credit to purchase them. Don’t. Don’t spend more than you earn. It’s only by mastering this fundamental principle that you’ll ever begin to accumulate wealth.
- Not saving enough. Glink writes: “Building wealth isn’t about how much money you earn each year; it’s about how much money you don’t spend.” When you’re just starting out, it’s difficult to find money to save. But even a little is better than nothing. Work to build an emergency fund. If you have the surplus, by all means max out your retirement plans!
- Failing to pay off debt. Carrying debt is like sitting beneath your own sword of Damocles — it hangs by a hair, ready to fall at any moment. When you’re burdened by debt, a single disaster can be enough to bury you. Don’t tempt fate. Eliminate debt as soon as possible.
- Looking for quick fixes. Get rich quick schemes are just that — schemes. Playing the lottery is not an investment strategy. That hot stock tip is not going to make you a millionaire. Multilevel marketing is just a good way to make your friends and family uncomfortable. Take the slow, sure path to wealth.
- Letting emotion interfere with your decisions. Humans are complex psychological creatures. It’s impossible for us to make decisions — financial or otherwise — completely without emotion. But when you let your emotions get the best of you, you end up in debt. You make poor investment decisions. You buy a house you cannot afford. You buy a shiny new Jetta when your three-year-old Focus still runs fine. As much as possible, separate emotion from your financial decisions.
- Trying to time the market. I’m guilty of this one from time-to-time. If 80-90% of professional mutual fund managers are unable to beat the market, what makes me think that I’m going to be any better? Glink is correct when she says that “the best way to invest in the market is to be steady and consistent”. She recommends dollar-cost averaging (a subject I haven’t covered yet). I think any sort of regular investing in index funds is a smart choice.
- Failing to diversify your investments. I consider this an “advanced mistake” — it’s a mistake that I won’t be able to make until I’ve accumulated significant investments. I not there yet. I’m still paying off debt. But Glink is correct: the best defense against a decline in any single stock is invest in many stocks. The best defense a decline in any single market is invest in several markets.
- Following fad investments. First it was real estate. Now it’s gold. What will it be next year? Don’t chase the hot investments. If they’re hot, they’ve already made significant gains, which means the prime buying opportunity has already passed. Buy low, sell high — remember? The same is true with stocks and mutual funds.
- Not taking enough risk. We all want our money to be safe. We worked hard to earn it, and we don’t want to lose any through investment mistakes. But the truth is the less risk you’re willing to take, the lower your potential returns. You could stick all of your money into a nice, safe savings account, but you’ll only make 1% on your money at best. Especially if you’re young, be willing to accept a little risk, especially if, as in the stock market, the long-term rewards are worth it.
I used to commit seven of these mistakes on a regular basis. I’ve mastered most of the problems now, though, so that I’m left mainly with two bugaboos: procrastination and market timing. And wouldn’t you know it? My financial life has turned around. In the past two-and-a-half years, I’ve trimmed nearly $15,000 in debt, have begun to save for retirement, and have established emergency savings.
Which of these mistakes is most troublesome for you? Procrastination? Looking for quick fixes? Failing to save?
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March 9th, 2007 at 5:33 am
My most troublesome mistake isn’t so much procrastination as laziness. For example, I’m currently paying far too much for a cellphone plan (I make an average of only 3 or 4 cellphone calls a month but I have a flat-rate plan for 200 minutes, so each of my calls is extremely expensive), and even though I would come out ahead financially if I cancelled the contract today and ate the cancellation fee, I don’t want to go through the hassle. My contract expires in September and I’ll probably just keep paying too much until then, which is stupid and I know it, but I do it anyway.
It’s like the parable of the three stages of enlightenment: in the first stage you don’t see the hole in the road and you fall into it. In the next stage, you see the hole but you fall into it anyway (that’s where I am right now). In the third stage, you see the hole and you walk around it.
March 9th, 2007 at 5:42 am
[...] stuff that somehow most people still haven’t internalized. The most recent post is “10 Common Money Mistakes“. Check it out if you get a chance! money You can follow any responses to this entry through [...]
March 9th, 2007 at 5:48 am
thankyou thankyou thankyou
I’m the ‘money savvy’ one amongst my tribe, but risk aversion and procrastination (and related issues around market timing and fads) mean I know I’m not effective managing my ££/$$.
Having it spelt out like this is going to do me wonders.
March 9th, 2007 at 6:11 am
Ok I’m really don’t like to admit this, but I can be horrible at Procrastinating.
I’ve had three big tasks to take care of with my money and I have been ignoring them for just about six months now.
Perhaps it’s time to suck it up and take care of a few messy items.
CD
March 9th, 2007 at 7:10 am
J.D.
Nice article, thanks. To your #7 & 8 I would add “being invested in the WRONG sector of the marketplace at the WRONG time” as well, we see people doing this all the time and they wonder why they’re not making money!
Cheers, Good Weekend,
Ralph
http://blog.successfulonlinetrading.com/
March 9th, 2007 at 7:42 am
Procrastinating and, to a lesser degree, market timing are my weaknesses as well.
March 9th, 2007 at 8:07 am
I’ve recently started following your blog, and I must say I’m quite impressed.
The only point in the list I disagree with is in #7 where dollar-cost-averaging is suggested. If you do it incidentally because you are investing as you earn it, like 401(k) contributions, that’s fine. But I’m opposed to holding a chunk of cash while you slowly invest a piece at a time over several weeks or months. The illusion of any benefits of such a strategy have been disproved academically. All you are really doing is slowly changing your asset allocation from more conservative to less conservative; no benefit there and is contrary to #10 from the list.
I’m doing okay with all ten items, but this is what I do for a living. Overall it’s a great list!
March 9th, 2007 at 9:13 am
I’m definitely in the procrastinating / lazy section and I’m not really diversified, although my argument is that I haven’t really accumulated enough to make it worth spreading out of cash and an index fund.
Other than that, I’m avoiding these mistakes pretty well. Which is a start.
March 9th, 2007 at 9:28 am
I think my biggest issue is risk aversion. I’m the type of guy that’s happy making a meager 5%/year, but I know I should branch out…that type of meager gain could bite me in the coming years.
Perhaps it’s time for me to branch out, and dip my little toe into some riskier ponds.
Great article! I’ll be pondering this list over the weekend. Thanks for sharing.
March 9th, 2007 at 10:03 am
Like Dylan above, I am also at odds with the suggestion of using dollar-cost-averaging but for different reasons. I believe that DCA is only a strategy for those who don’t want to actively manage their investments. Simply put, the “averaging” part is going to lead to average returns.
It is well established that the market goes through periods of both slow and accelerated growth. Over the long run it averages out to 10% or so, but if use a little timing to buy and sell your investments (such as last week’s “correction”) you can boost your returns significantly.
If you are perfectly content with buying an index fund (or ETF, or whatever) and using DCA to smooth out your returns, congratulations, you get a C. If you want an A in investing, you need to be a little more active. I’d rather pool my investment capital and attempt to “buy low, sell high” than just keep plugging my money into an index fund every week and DCA myself to mediocrity…
-Toby
March 9th, 2007 at 1:04 pm
@Ralph,
The whole point of being diversified is to ensure that you’re in *all* sectors at *all* times. The whole trouble with trying to jump into hot sectors is no one actually knows how long a hot streak will last. After all, a bubble is pretty good place to invest if you can figure out where one will form, jump in when it starts, and then jump out before it bursts. Most people can’t do it.
@Dylan,
I think the point of DCAing for the average Joe is to make sure that he keeps adding to the kitty. You’re right in that studies show that investing a lump sum at any given time typically yields better results over the long term than DCAing your way in. However, most people don’t have a pile of cash sitting around. They can only make contributions with each paycheck. DCAing for these guys will ensure that they will buy fewer shares when prices are high and more shares when prices are low.
@Toby,
Hindsight is always 20/20. Yes, it’s true that the market goes through periods of slow (or even negative) and accelerated growth. The trouble is, you never really know where the top or bottom are. We’ve all seen those statistics where gains are significantly blunted if a given investor misses even a dozen days over 20-year period. And we often find that fund managers are fully invested when a bubble bursts or are sitting on a pile of cash well after a recovery begins. So if the vast majority of these these smart Ivy League-trained money managers, with all their access to information, tend to underperform the index over the long term, why do you think you can do better? And why do you think you’d merit only a “C” grade if you manage to outperform 80-90% of the fund managers out there by buying the index?
March 9th, 2007 at 1:26 pm
Hi VinTek,
I appreciate your comments, here is my response to them
1. being invested in all sectors at all times is a great way to lose money, at best it is a mediocre approach towards investing in our opinion
2. I was NOT suggesting jumping on HOT sectors, I said people are often “in the WRONG sector at the WRONG time”, our entire work is based on being in sectors that are in the process of getting hot, not ALREADY HOT (this is often much easier to detect than people realize), and once positioned in those sectors to trail stop losses to insure profit protection …
3. I almost agree with your statement that “most people can’t do it”, I would rephrase it that “most people THINK they can’t do it”, we find that people can learn to be more targeted with their investment strategies and that this approach, although certainly not foolproof, can product outrageous returns as long as the investor exercises discipline with using profit protection and loss stops, they investor who is willing to wait 4 years to “breakeven” or “get their money back” from an investment gone bad will never get very far… what’s closer to the truth is “most people don’t have the discipline necessary for it”
This is, of course, our opinion, I respect others peoples points of view, including yours VinTek. I also realize that many people who read this blog may not agree with our opinion. We prefer to let the results speak for themselves.
Have a Great Weekend J.D. and Everybody, Cheers,
Ralph
http://blog.successfulonlinetrading.com/
March 9th, 2007 at 1:52 pm
I used to be a big procrastinator. I found that the Getting Things Done system worked wonders for my productivity.
There’s tip from the Automatic Millionaire that is really good too. Every morning before starting to work on the high priority items, tackle one medium or low priority item. It’s amazing how much of a relief it is to get those things off the to do list.
I’ve read it twice, and will probably read it again
March 9th, 2007 at 5:40 pm
Hi Ralph,
I appreciate your comments too. I realize that there are strong advocates of technical analysis, and that many of these advocates are smarter than me.
However, I have cast a skeptical eye at any poster who sells subscriptions to market reports. The fact that you have a financial interest in having people believe in your methods does make your information somewhat suspect.
I hardly think that having a properly diversified portfolio gives you mediocre returns. If being able to beat the 80-90% of the money managers over the long haul is mediocre, then by all means, give me mediocrity!
Here’s the problem I have with technical analysis. If it is indeed an exact science, there should be so many overwhelming success stories that even the most die-hard fundamental analysis advocate would have to concede the validity of technical analysis. And yet, even the technical analysts disagree among themselves as to which technical information yields the best results.
Also, supposing that technical analysis does indeed work. I think that the frequent trading that required by this methodology would by and large would generate taxes and fees that would offset any performance advantage yielded by the methodology. We’re talking a lot of short term capital gains here, which are taxed at the same rate as ordinary income. That’s a *big* hurdle to overcome, especially if you live in a place where there’s a state income tax in addition to the federal tax. If I had a combined marginal rate of let’s say 33%, I’d have to consistently have results 50% better than the overall market just to break even over say a total market stock fund which rarely trades. That’s a pretty tall order.
March 10th, 2007 at 6:38 am
@VinTek
You and I are using different barometers to measure our investing success/failure. You insist on using a bell curve. As long as you are doing better than other people, you are successful. How about attempting to beat the index itself? For me, the S&P 500 or the Russell 2000 are the numbers to beat. The index performance is my “C” marker. How much can I beat it by? I don’t care how many other people underperformed it!
The idea that you just can’t beat professionally trained money managers is a myth. It’s total bunk. You can do it and it’s not that hard.
Keep in mind that money managers have several disadvantages when it comes to investing that you, as an individual investor, doesn’t have to deal with.
They usually have 100s of millions or even billions of dollars to allocate, you probably have slightly less than that. That allows you to concentrate your investments down to some quality companies with the greatest chance of bubbling up. Furthermore, your returns are not diluted by being spread over so many different stocks which may be merely tracking the market averages.
They often have pension funds and other large investors that they have to answer to for taking (seemingly) unnecessary risks and/or failures. You have only yourself (and perhaps your spouse/family) to answer to when you screw up. This allows you to optimize the amount of risk you are willing to take.
Saying you just can’t beat the market is a cop-out. Go ahead, invest in the index and get your gentlemen’s “C”. I’ll send a postcard when I move to Omaha
-Toby
March 10th, 2007 at 6:56 am
Vintek,
No technical analyst in their right mind would tell you that TA is an exact science, and it’s true there is a wide array of technical methods. And there are many many traders who use various methods who make an incredibly good living, yes, even after paying taxes. I personally know many of them, and if I mentioned the kind of percentage returns they average per year no one would believe me.
To be clear, I am not selling a method; I am selling factual market analysis information. To say my information is suspect because I have a financial interest in selling it is just ludicrous. It’s like saying that all information is suspect because the author has a financial interest in selling it!! That would include all books ever written, all newspapers, magazines, etc…hmmm
One final note, the best traders I know will tell you technical analysis is both art and science, and that the trading method is actually only a small part of what leads to success. Read some of Dr. Alexander Elder’s books and note his comments about the trading method.
March 10th, 2007 at 11:09 am
Active management and indexing are like two different religions. While people do convert from one to the other, most practicing believers are not easily convinced to change their religion or investment approach absent experiencing some kind of awakening event first-hand.
Indexing is fairly strait forward, you’ll have very close to market returns; whereas, active management requires a little bit of faith because, like with miracles, you must discount luck and/or coincidence to explain outcomes.
I know there are people that time markets or sector rotate with some success, but as you look at longer and longer periods of time (5, 10, 15, 20 years), the number of successful investors decreases exponentially. The same observation holds true with a large group of people repeatedly trying to guess heads or tails. That tiny minority with a good record after numerous flips could make an argument that they are skilled or have found a good system while others say its luck.
All of this aside, I think it is more important to focus on why you are investing in the first place. Is it to preserve and grow the value of your savings to use at some future time in your life? Or, are you trying to win an imaginary competition against other investors? Ask yourselves: what does a positive result form either of the above questions get me? I’m familiar with the arguments of both, so there is no need to actually answer me.
VinTek, I think if you reread my comment about dollar-cost-averaging, you will see that I do not disagree with your reply.
March 15th, 2007 at 10:48 am
[...] 10 Common Money Mistakes [...]
March 16th, 2007 at 2:39 pm
I loved the discussion I found here (I’m new to reading your blog). After reading dozens of financial books myself (and I love The Automatic Millionaire mentioned above), I’ve been completely “cured” from the temptation to “time the market.” The last book I read did it. It’s called The Smartest Investment Book You’ll Ever Read by Daniel Solin. His credentials are excellent, but it’s the statistics he presents, and then, most of all, the names of the brilliant financial people who recommend the same method he pushes (basically index funds) that lifted me off the fence and plunked me solidly down on the side of do-it-yourself investing through index funds. I thought you might want to try out the book and see what you think. It’s a short read.
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