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Biggest Mistakes Investors Make

If you are like me, right about now you expect to be provided a litany of "things you should have done". Fair enough, we will get to that later. First, let's get a few things straight. This article is not being written by some financial guru who thinks everyone should know all the best things to do with their investments and taxes. I know better. Every day we get to counsel individuals who are constantly being bombarded with facts and details creating information overload. They are not coming to us because they are incapable of sorting it out for themselves. Given enough time and focus they could easily master the challenge. More often than not, what they require is the advice of a professional who understands the entire playing field and can help them avoid making mistakes.

Let's start by defining just what a mistake is. Webster states: to "interpret or judge incorrectly". Simple enough; we all do it on a fairly regular basis. There is no shame in admitting it. If there was, most of my day would be spent in a state of humiliation.

The shame lies in not recognizing our own limitations. We are products of our environment. None of us are born with the ability to make sound financial and tax decisions. This skill comes about through learning, practice and discipline. Unfortunately, our educational system has not proven itself adept at preparing most of us to make sound financial decisions. If it was, I doubt we would be in the midst of millions of homes going into foreclosure.

As for the practice part, let's face it: it is not easy. Most of us graduate from school with a mountain of debt and quickly find ourselves on a gerbil wheel of earning enough to pay our bills. We look around and see everyone doing the same. Before we know it there are new forms of debt for that car, the home and by the way---I really need that !!!! "No problem---charge it!'

As a result we are given limited opportunity to practice these skills since we lack the wherewithal to do anything differently.

Now comes the tough part: discipline. I know we all have an aversion to that word. It triggers a lot of negative thoughts. This is unfortunate because Webster defines it as: "training that develops self-control..." What a great concept in relation to tax and investment planning! In my mind, THIS IS IT! The disciplined investor is accumulating funds while others are looking for the winning lottery ticket or being good consumers in the pursuit of happiness.

So here is the BIGGEST MISTAKE INVESTORS MAKE: spending everything they earn! Nothing complicated here. Spend less than you earn and save the rest. Consider brown bagging two times a week to save $20. At 5% interest you would accumulate $34,000 in twenty years.

Once you master the discipline part the rest is relatively easy: avoid mistakes!

Here are the biggest!

• Not paying off your credit card each month. You lose the grace period. This can drive your effective interest rate to 42% from 18%.
• Not contributing the maximum to your pre-tax retirement plan (especially if there is a match by your employer).
• Investing in municipal bonds when you can get a higher after tax yield from regular corporate bonds.
• Getting your investment advice from the water cooler crowd or the talking heads on TV.
• Not spending the time to be educated on investments and taxes. There are some excellent books which will give you the necessary background to know what questions to ask.
• Being underinsured.
• Being over insured.
• Having the wrong insurance (read "overpriced").
• Buying annuities to save taxes.
• Buying annuities to have the "best of both worlds".
• Not asking a lot of questions from an advisor (hint: "how do you get paid?", "where do you go for advice?", and "what is your investment philosophy?").
• Buying an expensive home to save on taxes.
• Justifying anything "because it is tax deductible".
• Not taking an allowable deduction because you might get audited.
• Not using College Savings Plans to help fund your child or grandchild's education.
• Not using ROTH accounts or considering converting to ROTHs.
• Having all your investment eggs in one basket.
• Not being globally diversified (think of a country with 4% of the world's population and debt equal to roughly 85% of its Gross Domestic Product: hint: USA).
• Looking at the cost of your investment without considering the growth.
• Investing ONLY in no-load funds.
• Not having a cash reserve or an emergency fund.
• Investing money you will need in the next few years (think Vegas).
• Not filing your tax return because you do not have the money (think 5% per month interest/penalty).
• Adding to an investment because it's going down. For investors it is the equivalent of "doubling down" in Vegas.
• Following the herd with investment decisions (after all: $10,000 for an ounce of gold is possible!).
• Making an "interest free" loan to the government by having a large tax refund each year.

There you go. A list you can use to avoid mistakes along the road to a sound financial future!

- Timothy F. Terry