Financial Advisors Reveal 13 Money Mistakes That Are Some of the Worst Ever
Americans spend hours agonizing over how to improve their financial situation now and for the future. If you’re not sure how to manage your investments, check out what these financial planners consider the biggest money mistakes and what their advice is for each one.
13 of the Biggest Mistakes Financial Advisors Have Seen
Take a look at these mistakes that financial advisors have commonly seen and how to resolve them.
1. Assuming General Advice Applies To Your Financial Situation
If you spend any time on social media, you’ll find that there are all kinds of people claiming to be an “expert” about almost everything, including finances. However, it’s better to get financial advice from an actual expert, which is tailored for your specific situation.
“Personal finance is very personal, and some of the biggest mistakes I have seen come from an individual assuming that general advice applies to his or her situation,” said Charlotte Cowan Geletka, CFP, CRCP and managing partner at Silver Penny Financial Planning. There has been a rise in the amount of financial advice given through social media and while it can be beneficial to increase your financial knowledge, it may not be the best course of action for your individual situation. If someone on TikTok has successfully paid off his or her debt, that does not necessarily qualify that person as an expert to advise your situation.”
2. Overpaying for Mutual Funds
If your money is invested in actively managed mutual funds, chances are you’re overpaying your investment advisor. While many investors double down on active advice in an attempt to beat the overall market, research shows that it’s a losing strategy. A portfolio of low-cost index funds is likely to outperform 97 percent of actively managed funds.
That’s why Sophia Bera, a certified financial planner and founder of Gen Y Planning, seeks out low-cost, exchange-traded and index funds for her clients. “Managed mutual funds generally have expense ratios above 1 percent,” she said. “You can cut your expense ratio in half by switching to low-cost ETFs or index funds.” Some have fees of less than .25 percent, she added.
3. Getting Caught Up in the Media Hype When It Comes to Investing
You’ve likely seen ads and headlines that state things like “These Three Stock Picks Are Screaming Buys” or “Get Rich This Month With This Groundbreaking Investment Opportunity.” While those ads and headlines may be intriguing, they are not a pathway toward smart financial decision-making.
“I have also seen mistakes, where people get caught up in the allure of hot stocks or exciting investments de jour making splashy headlines,” said Geletka. “You must first develop a financial plan or a framework for which to filter all your investment decisions. As a CFP®, the best calls I get from clients are those asking about potential purchases or investments and asking if that will work with their financial plan. When you have a clear understanding of your overall financial picture and your goals, then it is much easier to make decisions.”
4. Owning Too Much Employer Stock
Many public companies offer corporate stock discounts to employees. This can be a great job perk, but it can also be problematic for those who fail to diversify the remainder of their investment portfolio.
Many employees “often assume that, because they are familiar with the company they work for, they know how the company’s stock will work,” said Jeffrey A. Bogart, a registered investment advisor with Sila Wealth Advisory. Unfortunately, that’s not always the case. Seemingly successful companies sometimes unexpectedly crash and burn.
A high concentration in employer stock can be particularly dangerous for those nearing retirement, said Bogart. “If the company crashes at that time,” he said, “the person is going to be working at Wal-Mart until they die.”
Bogart suggested investors hold a highly diversified portfolio, which can help mitigate the ups and downs of any one particular stock or sector. “Investing should be boring,” he added.
5. Holding Excessive Mutual Funds
Owning more than 10 different mutual funds could be a problem, said Rob Aeschbach, military personal finance expert.
“I find that many of the mutual funds own the same underlying securities,” said Aeschbach. “The client might have 12 different funds, but they all own Apple, Microsoft, Ford and so on.”
Consequently, a portfolio might not be as diversified as the investor believed, so the risk is greater than expected. The financial planning fix involves a review of the holdings within each individual mutual fund, which can easily be found online at Yahoo Finance or Morningstar. “An efficient, effective portfolio might need as few as three or four different mutual funds,” said Aeschbach.
6. Missing Out On a 401(k) Match
Passing on your employer’s retirement plan match is akin to casting aside free money. It was there for the taking, said Greg Smith, a senior certified financial planner at The Wise Investor Group at Baird. “By not taking advantage of the company match, you may be unwittingly delaying your point of financial independence.”
In addition, he said, when you contribute to a 401(k), your income is reduced by the amount of your contribution and “so too are the taxes that you’ll pay.” Conversely, if you have access to a Roth 401(k), you’ll forego an immediate tax benefit but can potentially profit from tax-free earnings over the lifetime of your account. “Your future self will thank your present self,” Smith said.
7. Overdoing Your House Purchase
Chloe Moore, a certified financial planner for tech professionals and owner of Financial Staples, said one of the biggest money mistakes she sees people make is buying too much house.
“When you stretch your budget to buy a house, you’re committing to a payment that is most likely your largest monthly expense,” said Moore. “In addition, people often underestimate the total cost of homeownership, which includes insurance, taxes, maintenance, and possibly association fees. To avoid buying too much house and being house poor, understand what you can afford based on your cash flow and financial goals. Don’t rely on a mortgage broker to tell you what you can afford. I also recommend having a solid emergency fund after the home purchase so you’re prepared to cover unexpected expenses that will inevitably pop up.”
8. Failing to Budget
Many financial advisors say that their clients don’t often know exactly where they spend their money, which can prevent them from reaching their financial goals. Jamie Ebersole, founder and CEO at Ebersole Financial in Wellesley Hills, Mass., recommended that clients get back to basics and start tracking the dollars they spend.
“This can be done easily on an Excel spreadsheet, through a service like Mint.com or on your personal checking account web page,” he said. “Without this clarity, we don’t know where we can cut our expenses or if we are overspending on certain non-essential items, like clothing or eating out. More important, we don’t know how much we have left over at the end of the month to allocate toward our savings goals.”
9. Meager Retirement Savings
Households, aged 45-54, are dramatically unprepared for retirement, according to a recent report released by Edward Jones and New Wave. The report found that 42% of those households do not have any retirement savings and the median retirement balance is only $100,000.
“We work for at least 25 to 35 years of our lives. Most people just keep putting off contributing to their portfolio, saying they will do it when they have money,” said Kassi Fetters, owner of Artica Financial Services, LLC.
Fetters suggested a 15% contribution to retirement accounts, at least as a start. “You need to actively figure out how much money you will need monthly in retirement, set that number, then calculate how much you need to contribute monthly to get there. It is a simple process but will set you up for wealth in the future,” she said.
10. Too Little Cash on Hand
Another mistake financial advisors see is people failing to establish an emergency savings account.
Without an emergency savings account in place, you could end up in a severe cash crunch if the roof leaks, the car breaks down or you unexpectedly lose your job. Smith said it’s important to know how much cash you need. “Is it three to six months’ worth of spending? Or is it six to twelve months?” he asked. If there is another income earner in your household, the lower level might be sufficient. If you’re the sole income earner, however, you might need to raise the bar.
11. Not Enough Insurance Coverage
“Many clients take the default position of accepting the life and disability coverages offered by their employer. In most cases, these policies do not come anywhere near the level they need to in order to protect their families’ interests,” said Ebersole.
Ebersole said it is unlikely your insurance policy will offer enough to cover your children’s college expenses, pay off the mortgage in full or replace 20 years’ or more of lost income. “We all have an aversion to thinking about bad outcomes,” he said. “But having proper life and disability insurance in place can give you the sense of well-being that comes from knowing that your family will be protected in the unlikely case that something bad happens.”
12. Failure to Rebalance a Portfolio
Over time, as certain investments perform well and others stay the course or even lose value, an investment portfolio can easily drift from its target allocation to one that’s unintentionally out of balance. This can increase an investor’s risk profile. That’s why it’s important to rebalance your portfolio.
“Investors have a hard time selling winners and losers,” said Cary A. Guffey, a certified financial planner with PNC Investments in Birmingham, Ala.
It’s easy to assume that an investment that’s done well before will perform well again, and vice versa. Unfortunately, that’s often not the case. “Rebalancing takes some of the emotion out of investing,” he said.
Cynthia Measom contributed to the reporting for this article.
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- The Wise Investor Group. "The Wise Investor Group | Top Financial Advisors."
- Edward Jones. "The Four Pillars of the New Retirement: What a Difference a Year Makes."