Why Do People Fail Financially? Poor Investing
You’ve made it to reason #4 to “Why Do People Fail Financially?”. In today’s post, we are going to talk about Poor Investing.
Poor Investing is Easy to Do
A better way to describe this would be that the chosen investments did not match up to the investor’s needs. Now that may sound like a bunch of bull, but the fact of the matter is that once people finally accumulate enough money to invest (and that may take years), they go and make their financial decisions based upon some hot tip their neighbor gave them because the neighbor has a nicer car or lawnmower. The logic being that your neighbor really must know what they are doing, and he wouldn’t lie to me since he lives right next door. But in reality, your neighbor is not you.
Let’s not forget the “hot tip” on television. I mean, after all, if you are on TV you must be a super-duper financial professional. Let’s just say that investing can be very complicated. The media plans it that way, and they feed your ego too—Your Opponent (Darth Vader from the Dark Side).
There was an infomercial on late-night TV where this guy literally said, “If you come to my seminar, I will teach you how to be rich. If you don’t, you’re stupid.” He said: “Look at me! I have beautiful women” (and you see several women in bikinis). He then said, “Look at my Rolls Royce,” and then repeated the invitation to come to his seminar… because “If you don’t, you’re stupid.” This is Poor Investing!
Never do you need to be stronger with your faith and realize that there is no such thing as a hot tip or that attending some seminar will somehow make you rich overnight. It’s just not going to happen. Investing is a carefully calculated and studied process that needs to be matched to your specific situation and risk tolerance, and no one else’s.
Don’t Do It If You Don’t Understand It
Here’s some basic advice: “If you don’t understand it, don’t do it.” I should also mention that if you’re not comfortable with an investment, it’s not worth it. We will not be going into much detail on investment planning in this book. Most of our readers need to focus on savings rather than investing, and there’s a big difference. It will become clearer as you get more and more into the book.
So why do people lose so much of their wealth with poor investing? Well, for one, investing should only occur after you have accumulated enough savings. You should never be forced (with an emphasis on the word forced) to liquidate the investment prematurely. Also, the decision to make an investment needs to match up with your time horizon, return expectations, and your risk tolerance.
Let’s use one practical example to bring this point home. Alan has a $100,000 Certificate of Deposit that came due and available to invest. He also found out that his neighbor has done really well in the stock market, specifically the S&P. Alan researches the Standard and Poor’s index. It has historically returned 10% since its inception in 1914. Alan and his wife Robin and daughter Miriam are also planning to move and buy a new home, the neighbor is not. That’s a Big Deal. The Hot Tip neighbor doesn’t know what Alan’s family plans are, what Alan and Robin’s risk tolerance level is, nor that they are looking to move to a new school district.
Alan’s money in the Certificate of Deposit took years to save up. But because of the Hot Tip neighbor, Alan opens up an online trading account. He even has the new App on his phone! Alan buys the stock representing the S&P Index SPDR S&P 500 ETF Trust (SPYDR) with the logic that he will be buying low and selling high. One year goes by, and he’s up 8%! Doing pretty good.
It’s January, and Miriam is going to be in a new school district this fall. So Alan and Robin start aggressively looking for the house to purchase so that the family will be able to move before the summer and get Miriam registered for school. They find the home they want, but they need a $40,000 down payment and $10,000 for a variety of one-time moving expenses. The mortgage is already approved, pending their $40,000 down payment. Everything is going great.
Was It Poor Investing? Bad News Coming!
Then Alan wakes up Monday morning to hear that there’s been a terrorist attack, and his portfolio is now worth $60,000! If he sells today, he will get $60,000.00, and if he doesn’t, it may be worth $40,000.00 tomorrow. He freaks out. The wifey says they have to move now. Miriam is already registered for the new school. They have already signed the contracts. The escrow is open. And they are committed to the purchase and locked in or face a lawsuit.
They ended up selling and losing 40%. Why? Not because it was a poor investment. The S&P will eventually recover. But it was a poor investment decision guided by their ego. A classic investment mismatch: they had a short-term money need and parked their money in a long-term investment.
Unless your day trading (SPYDR), you do it with long-term hold intentions of 5- 7 years minimum. The investment’s time horizon did not match the need. In this case, when you are going to need the money in the short-term, don’t worry about making money on the money. Forget the return, keep the money in cash, savings, or a money market fund. You just needed a safe place to hold it in anticipation of the home purchase.
It just doesn’t matter that Alan’s neighbor chose S&P and did well. It’s Alan and Robin’s family’s financial decision (The Family Had a Short Term Objective) to buy a new house. That should have been their focus. This type of investment mismatch happens all the time. Your Money, Your Goals!