I Was an Investment Adviser for Almost 20 Years: Here are the Most Common Financial Mistakes People Make
Written by
John Csiszar
Edited by
Zuri Anderson
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
One of the things you learn as an investment adviser for nearly 20 years is how people think and act when it comes to their investments.
After working for a major international brokerage firm and then managing my own investment advisory business, I’ve seen the highs and lows when it comes to all aspects of financial planning. My goal was always educating my clients to become better, more self-reliant investors and to steer them back onto the correct course if they started to go astray.
But along the way, I saw plenty of common financial mistakes. Here are some of the most common. If you can avoid these missteps, you’ll be on your way to building a solid financial plan and becoming a successful investor.
Being Too Aggressive
Individual investors are often a very confident bunch. According to a Financial Industry Regulatory Authority (FINRA) survey in 2022, approximately 64% of investors rate their investment knowledge highly. However, respondents in this category actually got more answers wrong on an investment quiz.
Overconfidence as an investor can be a big setback. It can blind you to the realities of the investment world and encourage you to think you can’t lose when it comes to picking individual winning stocks. This, in turn, often leads to an overconcentration in a small handful of stocks, taking away the benefits of diversification.
Being Too Conservative
Investors on the other end of the spectrum are too conservative. If you don’t introduce at least some level of risk into your portfolio, you’ll likely actually lose money after you factor in taxes and inflation.
This is particularly problematic for younger investors who are looking for long-term growth in their portfolios and who have the luxury of time to bounce back from any temporary market setbacks.
Having No Emergency Fund
Financial planning is a holistic enterprise. There’s no denying that socking away money for investments is a great thing. But if you don’t build a foundation of an emergency fund first then you’re taking a shortcut that could trip you up.
Without money set aside to cover unexpected expenses, you run the risk of either going into debt or being forced to withdraw money from your investments. Both are anathema to a successful financial plan.
Buying Too Much House
A home is the biggest investment that most Americans ever make. Unfortunately, the way the market is set up, it entices many to buy a more expensive home than they can really afford.
If you’re struggling to pay for your home — when factoring in your mortgage, insurance, maintenance, property taxes, and so on — you can’t enjoy it. Rather, you’ll be living under a huge amount of financial stress that can take all the joy out of your purchase, and potentially ruin your entire financial plan.
Failing To Max Out Retirement Accounts
Retirement accounts are one of the very best ways to build long-term wealth. Not only do you get tax benefits — including tax-deductible contributions to traditional IRAs and 401(k) plans and tax-free withdrawals from Roth IRAs — you’re also likely eligible for matching contributions from your employer. That’s the closest you’ll ever get to free money.
Investors should contribute enough to earn the maximum employer match because that’s a guaranteed return on that money, free of charge.
Running Up Credit Card Debt
Credit card debt can ruin even the best financial plan for two main reasons. First, it diverts money from your savings and investments to the pockets of the credit card companies. Second, you’re borrowing money at an extremely high interest rate, and it can rapidly compound beyond your control to the point that you can’t afford even the minimum payments.
Paying off credit card debt, on the other hand, could be the best investment you’ll ever make, as you’ll earn a “guaranteed return” of whatever your credit card interest rate is, often over 20% per year.
Investing Emotionally
The stock market is inherently volatile, and for many investors, this can trigger two types of emotions: Fear and greed. When the market is running higher, many investors think that they’re geniuses and that nothing can go wrong. This is when they tend to dump more and more money into their stocks, thinking their prices will go straight up.
But the market is a cyclical entity. When the inevitable correction or bear market comes along, as it always does eventually, many of these same investors panic, selling out their complete positions right at the market low.
The emotions of fear and greed can make investors buy high and sell low when they should be doing the exact opposite.
More From GOBankingRates
