By Michael Hathaway, CFP®, CFA®, AIF®
I have a small “confession” to make: even financial advisors can make poor decisions with money—and that very much includes myself. Just because I’m a financial planner and have worked in the finance industry for over 20 years does not mean I’m immune from making decisions I would (now) recommend against, especially as I reflect on these decisions that I have made. To help you avoid the same mistakes and improve your finances without the same pain I’ve caused/endured, I’d like to share my three biggest investing mistakes and what I’ve learned from them.
Investing Without Understanding My Monthly Cash Flow and Debt Obligations
Back when I had less experience with investing (and personal finance, in general), I was brimming with excitement at the thought of having my money work for me through my investments. I bought shares of IBM while working there, with great confidence in the future of the company. Yet even though IBM was, and again became a successful company, I still made a mistake here. The problem? I had debt obligations that I couldn’t fulfill through my monthly cash flow and needed the money I used for IBM stock to instead pay off credit card debts.
Despite IBM being a good investment, it wasn’t the right time for me to purchase the shares. I needed to focus on my own financial house first (and eliminate that pesky high-interest credit card debt) before I could focus on investing to build wealth.
In my years as a financial advisor, I often meet people who are eager to start or accelerate their investment journey. But before doing so, I now want to make sure that we have a firm grasp of their overall financial picture, including their cash flow and debt obligations before we ramp up their investing cash flows.
Not Diversifying Because of Overconfidence in a “Sure Thing”
We’ve all heard the saying “Don’t put all your eggs in one basket.” Well, I’m sure I had heard that saying before making this mistake, but I definitely didn’t follow it at the time! Back in the late 1990s, my work allowed me to be familiar with many tech companies and especially internet infrastructure companies.
After buying my first house (and after getting approval from the compliance department), I took my fairly large annual bonus and invested it in fewer than 10 stocks. These were internet companies that I knew well and was certain were “sure things.” Things obviously didn’t work out as I had planned when the dot-com crash came in the early 2000s, and I was let go from my job and needed some extra funds to cover living expenses. Which meant I had to sell those “sure thing” investments at a pretty sizable loss.
That mistake led me to my new investment strategy of using fully diversified investments like broad-based mutual funds and ETFs. I’m no longer in the stock-picking game trying to hit a home run; I simply want my portfolio (and those of my clients) to get solid returns over the long term by being widely diversified across the global economy. That means limiting exposure to any one company or sector, regardless of how confident you are that it’s the next big thing.
Another blunder is that I had to rely on selling investments to get me through a rough period after losing my job. Why? Because I didn’t have enough cash set aside in an emergency fund, which leads me to my next point.
Not Having a Robust Emergency Fund
Having a robust emergency fund, which can get you through emergencies and unexpected expenses, is now one of the primary building blocks of every financial plan I build. But it wasn’t always that way. As described above, I had to liquidate investments after a job loss to cover my expenses because I didn’t have enough cash saved up. There was another time in my life when I made a similar mistake.
I was about to get married, and five weeks prior to the wedding, I was laid off from a different job due to a corporate reorganization. While I was able to get by with a severance package and various consulting engagements, over time my income wasn’t enough to keep up with my expenses. As a result, I had to turn to selling investments, and eventually the equity in my home (by selling it) to make it through this time.
While it’s obvious now that everyone needs to have ample cash savings in case of an emergency, another lesson I learned is that there is real emotional pain from having to sell your investments to meet your daily living expenses. It’s especially painful to have to do this when markets are down, and when you believe it would all work out if you could just wait to sell.
Avoid These Mistakes (and More) With a Trusted Partner
While this isn’t an investing mistake, I do want to add one additional shortcut that I took during this time: I didn’t have a trusted partner to guide me through these situations. If I had a financial advisor at the time who could have offered me guidance – helping me prepare better and coaching me through the turmoil of these difficult decisions, I likely would have made better choices and been better off financially and emotionally because of it.
If you’d like an expert to help you make the best choices with your money, I’d love to see if I can help. To get started, email Mike@wealthmatters.com or give me a call at (707) 428-5500.
Michael Hathaway is a fiduciary financial advisor at Epsilon Financial Group, Inc., an independent, fee-only wealth management firm. Mike has worked in the finance industry for more than 20 years and brings a wealth of knowledge and experience in sophisticated financial planning to help his clients make sound financial decisions. He is known for caring deeply for his clients’ well-being, being compassionate, and thinking creatively to help clients attain their financial goals. He prioritizes building long-term relationships and takes the time to listen, understand, and explain so that his clients feel confident in their financial plan. Mike is a CERTIFIED FINANCIAL PLANNERTM, Chartered Financial Analyst® (CFA®), and Accredited Investment Fiduciary® (AIF®) professional; he has a bachelor’s degree in cybernetics from UCLA and an MBA in finance and accounting from the University of Virginia. When he’s not working at Epsilon, you can find Mike enjoying anything related to exercise and fitness. He especially loves activities in the great outdoors, such as mountain biking, camping, hiking, and snowshoeing. In the fall of 2016, Mike successfully climbed to the top of Mount Whitney in a single day, the highest peak in the continental United States. To learn more about Mike, connect with him on LinkedIn.