Investment Mistakes to Avoid: How NOT to Invest

In sharing this story of my first venture into the world of investing, I hope to help you avoid some of the same mistakes that I have made!  The good news about mistakes is that they can be valuable, if we learn from them!

Early in our marriage, my husband changed employers and we needed to make some decisions about how to invest the money which had accumulated in his 401k with his old employer.  We were told that we needed to roll the money into a new IRA, but didn't know much more than that.

We had recently moved, and I was not working at the time, so we did not have connections or first-hand knowledge of any financial professionals in the area.  I asked for a recommendation from a couple who taught a bible study that we attended at our church.  I looked up to this couple for both their Christian lifestyle and their biblical knowledge, and was excited that they were able to recommend a man who they referred to as a “Christian financial advisor”.

Up to this point of time, I had managed our money and made the very basic financial decisions such as how much to contribute to my husband’s 401k and which of the limited fund choices to use. Reasoning that my husband should be more involved in the decisions regarding our finances, I made a Saturday appointment so that he could meet with the financial advisor. 

When my husband returned home from the appointment, I inquired as to what he and the advisor had decided.  He showed me some signed paperwork and information about two stock mutual funds.  When I asked why he choose those particular funds he answered that the advisor had given him a list of funds, and he had chosen one at the top of the list and one at the bottom!  Although I can smile about this now, I cringe to think of how many other people make financial similar financial decisions with much larger sums of money than we had at the time.

The advisor had provided no guidance, saying that they were all "good" funds; no evaluation of our risk tolerance, no questions about financial goals or what other investments we owned, no discussion of diversification or an asset allocation plan.  An investment is only “good”, if it fits a particular individual’s goals and risk tolerance. And for this, we were sold two “front load" funds, meaning that 5.5% of our money was paid as a commission to the advisor, rather than invested for future earnings!  

To give the advisor the benefit of the doubt, he may have tried to discuss these things, and my dear hubbies eyes may have glazed over.  If the conversation took a turn towards sports for even a moment, they probably never even got back to talking about investments!

So what mistakes did we make?  I can think of at least a three major mistakes that we made:  
  1. We didn’t have a plan.  Actually, we kind of had a plan: Make the most money we could on our investments, so that we could retire someday.  (Sadly, that is about as specific as the average American’s financial planning gets.)   However, that general plan needed to be fine tuned through either research on our own or through the guidance of a trained financial planner.  At the very least, my husband and I needed to spend time discussing our short term and long term goals and how much risk each of us was comfortable with for our investments. 
2.      We didn’t know enough to ask some basic questions.  In my opinion, no one should blindly trust ANY financial professional with your hard earned money.  If you are married, at least one of you should take the responsibility to learn some basic financial principles.  You don’t have to become an expert on all matters financial, but you should attempt to become educated enough to know when something doesn’t sound right.  If a financial advisor tells you that he or she can guarantee you a 10% return on your money with no risk, you should RUN fast!  A very basic knowledge of the principle of risk and return would raise that red flag! 
3.      We didn’t know that there are huge differences in education, independence and compensation structure between individuals referred to as “financial advisors”.   Basically anyone can refer to themselves as a “financial advisor.”  We were actually dealing with a “broker” who made a commission from selling us a product, which may or may not have been in our best interest. Please see my article How to Choose a Financial Advisor.    

The good news is that we have learned from, and recovered from, our mistakes, and hopefully with a little education and effort on your part, you will not make the same mistakes!