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March 11, 2021
Recently online, individual NewRetirement subscribers were discussing the most foolish financial decisions they had ever made.
The conversations were interesting in that many highlighted a few bits of “wisdom” about being “foolish.”
Making foolish decisions can be one of the greatest learning tools.
“A wise man can learn more from a foolish question than a fool can learn from a wise answer.” — Bruce Lee
“For God’s sake, give me the young man who has brains enough to make a fool of himself.” — Robert Louis Stevenson
While there can be much at stake when making foolish money moves, sometimes your choices can create more wealth in the long run through lessons learned.
One way to learn from foolish mistakes — without actually enduring the consequences — is to model your choices and see what might happen in the future. The NewRetirement Planner makes it easy to model financial decisions and compare different outcomes so you can decide what is really right for you.
“The greatest lesson in life is to know that even fools are right sometimes.” — Sir Winston Churchill
And, to paraphrase a classic idiom, “One person’s foolishness is another one’s wisdom.”
No single financial option is going to be right for everyone. You have your own types of resources, goals, and values. You need to make choices that are right for you.
It was interesting to hear how some people were dismayed by certain decisions that others found to be smart money moves.
Allen laments, “Doing all of my own financial planning, figuring I didn’t want to pay someone to do it…how hard could it be? I lost HALF of my portfolio in the 2008 downturn. I gladly pay a qualified planner now, always insist on ‘no load’ holdings, and am now we diversified with SOME ‘mutuals,’ but also small amounts (100 shares and less) of many individual stocks that are performing well.”
It is true, a financial advisor can help you stay out of trouble. They can help you set a strategy for your investments and stay the course when the market goes haywire.
However, many people decry the costs of using a financial advisor for investments — particularly if they are charging you a percentage of your Assets Under Management (AUM). These fees can be thousands or tens of thousands of dollars every year, depending on the value of your savings.
Worse yet, since this is now money that you can’t reinvest, you’re giving up the compounding your money would otherwise be doing.
The average wealth manager charges around 1% a year. So, if you have a $500,000 portfolio, you are paying them $5,000 every year, and giving up the potential growth investing an extra $5k would give you over the years.
NOTE: NewRetirement offers fiduciary advice from an independent fee-only Certified Financial Planner. Consultations are by phone or video call and, by using the NewRetirement Planner, the process is collaborative, cost-effective, and efficient.
Frank made some foolish decisions early on. He recounts, “Buying our first home with 3% down and credit card debt and no savings, then a few months later my wife lost her job and we ended up filing bankruptcy. When I finally started making good money, making up for lost time and spending too much on stuff, vacations, etc.”
The good news? Frank learned valuable lessons and has valuable advice: “The other side of that is I learned a ton from the bankruptcy, and haven’t had credit card debt since the ’90s. 20% down on our 2nd and final home and paid it off in 15 years.”
“Doing Roth conversions and shifting my 401(k) contributions towards a Roth 401(k), and back door Roth’s. Larger than normal emergency fund to protect from a job loss. Been maxing out my retirement account for years and opened a brokerage to save even more.”
“Learned that buying stuff doesn’t really matter, would rather save and invest to buy back my time so I can retire early. And I don’t regret any of the vacations, traveled to lots of places around the world and those experiences and what I learned have stayed with me and always will.”
“So in the end, lots of stupid things, but all of them were the cost of my life education and I can’t change any of it. What I can, and am doing, is passing these life lessons on to my kids, nieces, and nephews and I know they will be way ahead of where I was. So for that, it was all worth it.”
Brian regrets, “Panicking and selling off half my stock holdings at the bottom of the market late last March. While I missed the most rapid part of the recovery through June, I did slowly buy back in and went back to my prior allocation in July.”
Phil recouped his losses but also sold at a foolish time. He said his most foolish decision was “Buying Apple stock at $20, watching it go down to $12, then dumping it as soon as it hit $20 again. Within a few months, they announced the iPad and…”
This is the classic — and very common — mistake. Emotions take over when the markets crash.
Explore tips for weathering a stock market correction.
Jill also lost a significant portion of her savings in the 2008 financial crisis and worried tremendously, only realizing later that her concerns were unfounded. Luckily she held onto her holdings and they regained their value.
“I don’t remember how much money I lost in the 2008 crisis, but it was a lot. I was absolutely so despondent and thought that all of my plans were completely ruined. Luckily though we didn’t sell any of our investments. My husband kept a pretty cool head at the time — it helped that we were both still working. We didn’t even need to withdraw funds during the downturn. Boy did I feel stupid about worrying so much about it,” she said.
A loss is not actually a loss if you don’t sell.
Long-term investors have historically always prospered — the trajectory has always been up, given enough time.
The stock market goes up and down in the short term. Over the long haul, it has historically done nothing but go up. Even a worst-case year, two-year, five-year, or longer contraction of the economy will eventually rebound, assuming that history holds true.
Tom recounts, “In 2001, I got a decent number of options that had a 20-year exercise period. I had just gotten divorced and was the custodial parent and I exercised the options and picked-up something like $10K at most. I didn’t fully realize the value of such a long exercise period. They would have expired last month and just to pour some salt into an open wound, I ran the value using my company’s current stock price (I’m still at the same employer). The options would have been worth about $400K or so.”
Ouch. Three hundred and ninety thousand dollars is a big “virtual loss.”
However, depending on many factors, financial experts might advise that Tom did the right thing. The decision for when to exercise options can be complicated — holding the stock rather than the option can increase risks — and myriad tax consequences must be considered.
As with many things financial, there is no one right answer.
Richard for example, said, “I too had options and stock awards. Conventional wisdom said exercise options and take the cash. I did the opposite and took shares of stock and enrolled in the DRIP. That was 10–15 years ago and now those dividends generate enough to pay my property taxes, if need be.”
You might be surprised to think of marriage as a financial decision. However, marriage usually impacts every big decision you make in life — where to live, how much you work, when you retire, children, how you spend, and more.
Ragland said that his most foolish financial decision was “Marrying my first wife. After she left, I learned from my mistake and did much better with a second wife (we’re still happily married after 30+ years).”
Kathryn agreed. In her case, the wrong spouse cost her terribly: “My most foolish decision was getting married to a guy whose “job” (which I never agreed to) was trading stocks with my paychecks. A million of my hard-earned money lost…led to divorce…it has taken me 15 years plus to recover and am now looking forward to a much lower retirement income than I would have otherwise enjoyed. Many years of work lost down the toilet.”
She continued, “It took planning and determination, but I won in the end…diligently paying off debts of his, digging out of a hole that was not my doing and scrimping and saving until I accrued over a million myself…”
Dick regrets “Buying a BMW.” Amy feels bad about buying new cars when she was younger, “It took me until my early 40s to wise up. Currently driving a 2012 Highlander with 80,000 miles and she’s a keeper!”
Paramartha reassures Amy, “Don’t feel bad. I recently conducted an informal survey among my former college classmates. 95% of us committed that very mistake not long after our first paycheck!”
Steve disagrees, “New cars aren’t always a mistake. If you look at the resale cost of say, a Honda or Toyota, the used car makes less sense to me. Often, a new car is only a few thousand more than a 2–3 year old one. If you’re looking at something like a Ford Fusion or Chevy Impala, you might save almost 40%, maybe more. Some half-ton pickups hold their value well too, so a new one might be the better buy. We’ve bought both in the past. Have no regrets buying a 2006 Honda Civic which we still have.”
Tom adds, “There is lots of passion around the new/used conversation. We buy new, but keep for over 10 years per vehicle and we pay cash. I know that in pure math, it would be better to take that cash, buy a used Honda accord and invest the rest. But I enjoy my car and sometimes it is OK to enjoy life now.”
However, the thrill of driving, the pleasure of the open road, or the adventure of seeing more of the world should not be brushed under the rug for those of us who may appreciate it. Just be sure that you splurge because it brings YOU happiness and NOT to simply keep up with the Joneses.
It is worth considering your transportation costs though. Did you know that transportation might be a bigger budget item in retirement than even healthcare?
Steve said, “[The] biggest mistake we ever made was going in half with relative on a company called Pneu-Logic. Lost $50,000.”
If you have adequate assets to take risks and you know something about your investments, then it can be very rewarding to invest in start-ups and little-known ventures. However, it is not a place you want to put money that you can’t stand losing.
John’s foolish decision was not investing in Roths when they first became available. “Roth IRAs started in 1997. My first contribution was not until 2012. Dumb. Fortunately, I made up for it by pouring 13% in a traditional 401(k) for 30 years, but that’s all going to be taxed.”
Tom agreed, “You beat me by 2 years on the Roth — I didn’t start mine until 2014 as I had never heard about the backdoor Roth until I meet with a financial planner. That one idea justified his fee.”
A Roth conversion is when you take money that you have in a traditional 401(k) or IRA account and move it into a Roth 401(k) or IRA. When you do this, you will need to pay taxes on the money you withdraw as ordinary income. However, any future gains will grow tax-free.
The NewRetirement Retirement Planner enables you to model a Roth conversion against your own situation to better assess how the move could impact your finances.
Howard feels like it was foolish when he “Bought into a fixed commercial mortgage paper paying 6%…paid 0.5 % monthly…all was well for 3 months, then the payer went bankrupt. Ended up being a Ponzi scheme….Woodbridge. Got back about 20% over the last 3 years and hopefully will recover a total of 70% over the next 3 years.”
As you get older, you are scientifically proven to be at a greater risk of financial scams due to 1) how your brain evolves and 2) it is known that the most money is controlled by those who are older.
Learn about age-related financial vulnerability and 7 ways to protect your retirement from investment fraud.
Real estate can be a great alternative investment. And buying and owning your home is widely considered to be one of the best financial moves anyone can ever make (though, there are exceptions).
Jacqueline, however, got caught in the 2008 real estate crash. She said that “[She] was one of those people who financed a builder model with leaseback — which was a great deal. The builder paid everything in monthly payments to [her]. When it was time for them to pull out [she] had a great sale offer, but did not take it. [She] would have made $500k. Then [she] turned down a lower offer. Then the 2008 real estate crash happened. [Her] home was worth $800k less. It took 5 years and negotiation with the bank. [She] still believes you have to take certain educated risks in life. But, as you get older, not so much.”
Your home equity can be a valuable resource for your retirement. Explore how to use home equity for retirement income, cash, leverage, or a backup plan.
Or, learn about 8 ways to invest in real estate for retirement.
Chuck decried his foolish decision, saying, “Tried to double $20,000 of funny money using shorts. Not a good idea and the end of day-trading days.”
Day trading can be fun, but only with funds that you don’t mind losing. And, always remember that the institutional investors have access to far more information than you will ever get. It is really hard for professional investors to outperform the market, let alone you — no matter how much expertise you may (or may not) have.
Rick made a heartfelt, but foolish mistake. He said, “I withdrew money from my IRA during my peak earning year to pre-pay cemetery and funeral expenses for myself, my wife, and our 33-year-old special needs son.”
Worry, doubt, caution, love — these are powerful emotions. And, the desire to make sure that certain aspects of your financial future are taken care of can be a powerful pull. However, emotions aren’t always the best motivator for financial decisions.
If you sometimes use emotions — knowingly or not — to influence a financial choice, you might benefit from reading one of these articles:
Richard regrets cramming too many expenses into a short time period. He related, “I purchased a vacation home with a 9-3/4% mortgage the year before the first of my four children were off to college and I would have 1, 2, or 3 in college at the same time for the next ten years.”
This is a good example of why a truly comprehensive financial plan can be helpful. The Budgeter in the NewRetirement Planner can help you think through your current and future spending in more than 75 different categories — helping you to anticipate costs.
Scott’s most foolish financial move was “Not starting an HSA years ago when it was first available.”
And, Paramartha agreed, “Me too! And I choose to lay the responsibility of that error on a couple of HR people at my company who misrepresented “facts” about HSAs. When I did my own research I could not find any fault with them.”
You need to have a high deductible health insurance plan to quality, as well as meeting a few other criteria, but HSAs are one of the most tax-advantaged ways to save money.
Learn more about HSAs.
Philip’s foolish decision is another common mistake. He said, “I pulled too much cash out of the portfolio too far in advance of retirement…”
This happens to many people as most of us are used to thinking about money as cash flow.
However, it may be useful for you to think about your finances not as a monthly inflow and outflow, but rather as a big pool that you fill up or drain over your entire life. Think in terms of the lifetime value of your financial decisions rather than simply how it impacts you today.
You see, in life, you have a finite amount of time to create a finite amount of money. That money is used to fund your entire life. Spending more now means that you have less to spend later. Saving more now means spending less in the near term, but more in the future. And if you invest that money you save, you may even end up with more overall.
Creating and maintaining a detailed retirement plan is a great way to visualize and manage your total pool of resources over your entire lifetime.
Christy wishes she had adopted a long-term buy and hold strategy on at least one of her holdings. She said her most foolish decision was, “Selling my 10,000 shares of Netflix in 2004. I would be TOTALLY retired if I still had those shares…”
Brian and Elaine made similar mistakes with Tesla stock. Elaine sold Tesla in 2018. Brian bought at $175 and sold at $250.
Henry wisely chimed in, “This is why it’s dumb when someone says ‘Imagine if I had bought TSLA when it was $10!!’
I say ‘Yep you would have sold happily at 40 for a 300% gain and today’s statement would instead be “Imagine if I had held TSLA instead of selling at 40.”‘”
J.C. says, “I used to be a stock picker. Stupid. I now own low-cost, highly diversified funds.”
Sounds like J.D. indeed learned a valuable lesson.
Pat regrets, “We skipped our annual family vacation two or three times because I didn’t think we could afford it at the time. Stupid. Those experiences are priceless.”
Sometimes the most valuable thing you can do is to spend money, not save it for the future. Your time is a critical factor to include in your financial planning models.
As the Greek philosopher, Theophrastus said, “Time is the most valuable thing a man can spend.”
Frank’s most foolish financial decision was “Lending money to friends.”
The foolish part was not only financial. He lost money and it ruined the friendship.
Jan made another classic blunder. She regrets “Retiring and claiming social security at 62. It was okay at the time because I was married and he asked me to retire and he’d pay all the bills. Unfortunately, 12 months later he filed for divorce and our net worth was split and my social security didn’t pay the bills. It was too late to undo Social Security by about two weeks. I had no job, no car, no home! Until I could get Medicare, I had to limit my income so I could afford ACA, which meant I couldn’t access retirement accounts. It was an enormous setback.”
The good news she said “Fortunately, he left my retirement accounts intact and we sold a rental which gave me money to pay cash for a house and used car. In the end, I’m better off, and the only thing I really miss is the travel budget we had planned.”
When to start Social Security is indeed a massive decision with lifelong implications. You want to get it right.
George said that he “Quit buying Dreyfus mutual funds on a monthly contribution basis in the 1960s. I had a young family and thought I needed the money for expenses. In retrospect, I could have afforded it if I realized how much money I could have accumulated. I was in my 20s at the time.”
Ah yes, youth is wasted on the young — at least the young who don’t develop a habit of regular saving and investing.
The NewRetirement Planner enables you to build your path to a wealthier and more secure financial future.
Model your options, to help you avoid foolish decisions that you might regret later in life.
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