Good money decisions typically involve some form of patience. Bad money decisions – the types that can lose you thousands – even millions – of dollars – come in various forms. Here are some of the top ways to make money vanish into thin air:
- Concentrate your money into just a few stocks. Sure, Warren Buffett did this amazingly well — but have you ever counted how many Warren Buffett’s there are? Just one. The likelihood of you replicating his achievements are about, well, one divided by the world’s total population. Diversify your portfolio instead.
- Sell your stock investments when markets tank. Again, there are some people that are able to effectively time markets and take advantage of sell-offs. But these are the minority. Most people do not have the temperament (or the crystal ball) to sell low and then buy super-low.
- Excessively borrow or leverage. During the housing boom, many people thought they could borrow lots of money to flip homes for big profits. We know how that played out. Today, leveraged ETFs are popular. These products sound amazing — but many people overlook the fine print. Most of them are designed to double or triple the movement of a market over a one day period. Holding them for longer often results in terrible outcomes.
- Falling for scams — on the phone or online. Handing over money to a stranger is a recipe for a big hole in your bank account. Clicking on too good to be true emails or password change requests is also a no-no. If you receive any communication requesting some kind of follow-up, go to the official company website to log-on or call the company via its published numbers.
- Taking early withdrawals from IRAs or 401ks. If you are under 59 1/2 and withdraw money from these types of accounts, unless you meet one of the IRS’s exceptions, you’ll have to pay taxes and a 10% penalty on whatever you take out. That can make a big sum of money a lot smaller.
- Making investments in unproven businesses. Investing in new ventures is very difficult. Sure, some people make big bets, invest in new companies and earn large pay-offs, but as the oft-repeated phrase goes — most new businesses fail. It does not matter if the investment is in real estate, healthcare, renewable energy or a family member’s passion project. If you are not an expert in the field, you must get professional advice on the potential merits and risks of any startup investment. Relying on a promoter’s pitch when making a decision is asking for trouble. If you are not willing to put the time in to do exhaustive research of your own, your wallet may look sad in a year or two.
Before making significant financial moves consider asking the following questions. If you can comfortably answer all of them, you’ll be in much better shape to make a reasonable decision.
- What are the risks of going forward with this choice?
- Can I live with the potential downsides?
- Is greed or fear motivating my decision?
Jonathan Bernstein is a Senior Research Analyst within Hefren-Tillotson’s investment advisory group. Jonathan is a graduate of Yale College, a Chartered Financial Analyst charter holder (CFA) and a CERTIFIED FINANCIAL PLANNER certificant.