Financial Blunders

Have you ever given thought to what might have been your worst financial mistake?

For many, the answer does not become apparent until hindsight arrives.

Regrettably, many baby boomers and their parents admit that their worst financial mistake was doing it alone, and not working with a trained and experienced financial advisor.

When I first became a financial advisor a number of years ago, investing was a lot simpler. Sometimes, a prospective client would ask if it made sense to do it alone, rather than working with an advisor.

Back then, my truthful answer was, “Yes, you certainly could be successful as a do-it-yourself investor, providing you had the time, inclination, and resources to conduct your own research, and as long as you believed that you could make sound investment choices thereby avoiding the “investor dilemma” of overload and emotion based responses.”

In the last decade however, we have observed too many do-it-yourself investors stumbling, making critical mistakes, and not even realizing mistakes have been made until it is too late. I realized that investing and financial planning had become so complex that overlooking a simple point or making a seemingly minor error could cause a substantial dent in your family’s nest egg and financial security.

What mistakes are made by do-it-yourself investors? Here are a few examples of what I saw then, and unfortunately, what I still see today.

• ·        Selecting investments based on its past performance. But it is crystal clear that past performance is a very poor indicator of future performance. Just ask regulators such as FINRA (The Financial Industry Regulatory Authority) or the SEC (Securities and Exchange Commission).

• ·        Costly and often irreversible IRA mistakes. IRA’s, rollovers, 401(k)’s and other types of retirement plans operate with their own special set of rules. Inherited IRA’s have rules that are different yet. Failure to get it right can result in severe tax penalties.

• ·        Poor diversification, resulting in unacceptable risk and wild portfolio swings. Just a few weeks ago, I was introduced to a 65 year old woman with an aggressive portfolio allocation more suitable to a 30 year old. She did not even realize the risk she had assumed.

Still, investing is probably one of the top areas where self-practitioners are the most confident. Many may ask themselves, “How difficult can this be? All I have to do is read the financial section of the Sunday paper, look up a specific company, mutual fund, or other investment, watch a few financial television shows on the topic, and perhaps listen to a radio program or two. Perhaps supplement that research by subscribing to a couple of investment newsletters, check out the investment’s track record, discuss it with your barber or hair dresser, think about it for a couple of weeks, and then take the plunge.”

In the meantime, when a scrap of news – any scrap of news, positive or negative, comes out about any particular stock – the professional traders may be making tens of thousands of computerized trades within milliseconds of that news becoming public. They may even time their buy transactions to occur perhaps a second before the close of a day’s business, and their sell transactions 1/2 of a second later.

AND EVEN THEN, THEY OFTEN GET IT WRONG!

So, how could a do-it-yourself investor possibly win?

The answer is that, while one might have been moderately successful many years ago acting as their own advisor, the odds are now stacked against that course of action.

Of course, you could be lucky. You could win, and congratulate yourself for your investing skills. But is it really skill? Or is it just gambling and speculating with your money. Need some coaching, give us a call?

Here’s a link to a 3 minute video featuring several investor insights regarding this issue.

Regarding this video, I would like to disclose that I have absolutely no relationship with its sponsor. I just think they do a superb job of presenting the case for not making “Your Worst Financial Mistake.”

http://www.youtube.com/watch?v=e0ToPPvD6zo&feature=player_embedded#!