5 (More) Classic Investing Mistakes

by Mar 10, 2022Personal Finance

Have you (or someone you know) ever made one of these classic and costly mistakes?

Following our first installment on classic investor mistakes, we share 5 more costly errors. Please don’t ignore them!

1. Don’t ignore your investment purpose

What is your goal with a particular investment? Many investors think their goal is to make a killing or find a “ten-bagger” or discover the next Microsoft.

That would be an unfortunate oversimplification.

Different people invest for different reasons: growth, income, retirement, short-term, long-term or “fun” (meaning speculation).

You might even need to invest for all of these reasons. That’s important to know, so you can consciously allocate the right funds from the right bucket to the right investment.

2. Don’t ignore taxes

It’s critical to your financial health that you have a basic understanding of the tax consequences of your actions. For example:

  • If you invest in a Traditional IRA, be aware that you will be taxed as ordinary income when you withdraw the money during retirement.
  • If you invest in a Roth IRA, as long as the law doesn’t change, you will never be taxed when you withdraw the money during retirement.
  • Stocks purchased in a taxable account, and that are held for less than a year will be taxed as ordinary income. However, if you hold the shares for at least one year and one day, your tax rate as of this writing is 0%, 15% or 20%, depending on your income and filing status.

Newsflash: I am not a tax advisor, so please consult with your tax professional, financial advisor or accountant before investing and making decisions based on tax considerations.

3. Don’t invest in the wrong account

If you are investing in retirement accounts (Traditional IRA, Roth IRA, 401k, etc.) with money you need to pay for a wedding, buy a sailboat or pay for a safari in Kenya, you should know (assuming you’re not retired) that you will likely have to pay taxes and/or a penalty when you withdraw. That makes for a ridiculously expensive wedding, boat or safari!

Money you might need in the short term should be invested in a taxable account that you can access easily.

Depending on the timeframe, it should arguably not even be invested. It should be held in a bank account that is easily accessible.

(Note: The Vet Financial Summit does not recommend buying a sailboat – or a boat of any kind – but highly encourages readers to go on a safari.)

4. Learn from your mistakes

As the saying goes, it’s OK to make mistakes, as long as you learn from them.

If you invested in the wrong account (taxable vs. tax-deferred vs. tax-free), why is that? How can you prevent it next time?

If you trusted the wrong advice (from your neighbor, your brother-in-law, your Uber driver, your hairdresser or your breeder), why is that? How can you prevent it in the future?

If you invested too much in one particular investment, why is that? How can you prevent it from happening again?

Making a financial mistake is called tuition. Repeating the same mistake is sad… or silly.

5. Know what you’re doing

An investor we will call Sam (named after his least favorite Uncle) signed up for an investment account. Not knowing any better, Sam clicked a box that allowed investments on margin (this means that Sam could borrow from the broker to buy more stocks).

What Sam didn’t understand is that margin has a cost. It’s effectively a loan from the broker. With a significant interest rate attached to it!

In addition, Sam didn’t understand the importance of being organized. Then one day, by complete accident, Sam read something peculiar on a financial statement (which fortunately arrived by mail, since Sam is slightly old school and hates emailed statements). It showed fees associated with margin.

Fortunately, rather than ignoring the mysterious charges, Sam called the broker to understand the source of the fees… and Eureka! The light bulb went off! Sam promptly canceled the margin option after paying a very hefty “tuition” fee (almost $1,000).

There are countless other financial mistakes to be made. A wiser choice is to learn about investing from books, knowledgeable people, blogs and reliable sources such as the Vet Financial Summit and the Vet Financial Podcast.

Then you can apply your financial knowledge to make wiser investments.

Phil Zeltzman, DVM, DACVS, CVJ, Fear Free Certified