Six Big Financial Mistakes
In the latest issue of World Magazine (May 3/10, 2008), David Bahnsen list six common mistakes that investors make. He notes that there are obviously more than six mistakes, but the majority of the errors that we make can be generally placed into one of these six areas. Below are the six mistakes with a little commentary from me:
1. Panic.
As I have mentioned before, the media loves to hype bad news. We need to be wary that we do not panic, ever - even if things are going south. We need to remain calm and make good financial decisions based on good information, not hype or greed.
2. Euphoria.
Just like we need to avoid panic, we also need to avoid the opposite extreme. Euphoria is what got some people into the financial mess they are in now - seeing how home prices were going up, up, and up, they bought into a lie that this would continue indefinitely. They got caught up into the hype and made some bad financial decisions based on emotion and the moment.
3. Under-Diversification.
Not having a diversified investment portfolio can wreck havoc on you financially. How many times do we read about a company going under and then the media talks to people who had their life savings invested in that company? None of us should have our investments in just one place, nor in just one type of investment. We should be in multiple stocks, bonds, etc. With the ease of investing today, there is no excuse for not having a broadly diversified investment portfolio.
4. Over-diversification.
Again, we need to avoid extremes. As I mentioned above, under-diversification adds unnecessary risk. But over-diviersification can also be bad - just think about the extra fees that will eat into your profits, or the complexity of trying to track everything.
5. Excessive Leverage.
Now before everyone starts commenting, it says excessive leveraging. Most of us do leverage things - even the idea of borrowing money for a house is a form of leveraging. But it is the excessive leveraging that gets people into trouble. Again, think of the housing market and those who were 100 percent financed, and then the bottom dropped out and they are now upside down on their mortgage. Do not leverage more than you can afford to lose. Period.
6. Allowing Tax Decisions To Guide Investment Decisions.
It is important to take taxes into consideration when making investment decisions. But that is not the only consideration. Yes we should try to minimize our tax exposure as much as possible, but not to the detriment of not being diversified, or missing out on profits.
If we can avoid making these six mistakes, it will greatly help us on our journey to financial freedom.
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Matt said,
Wrote on May 6, 2008 @ 9:28 am
Most of the 6 mistakes are pretty much common sense, which is sometimes hard to find especially when it comes to a sensitive subject such as money. The one thing I would say is that to avoid most of the pitfalls above is to think through your decisions. When you’re not sure seek advice from a professional or at the very least a knowledgeable person.
Penny Saved said,
Wrote on May 9, 2008 @ 10:00 am
#4 is a great one to include on this list. Many preach diversification as if it’s the ultimate road to riches. But too much is just as bad ( maybe worse ) than not enough. Good list JD.
JD said,
Wrote on May 11, 2008 @ 5:46 am
Matt, you’re right, most of what is included is common sense - but I am finding that it is less and less common! Thanks for taking the time to write.