Financial implosions make headlines. It’s also news when rich and famous people like Jack Kent Cooke make huge, public estate planning mistakes. Yet the average person is just as prone to making painful financial errors time and time again, even if their mistakes never go viral on social media. That’s true even in Washington, DC, which is one of the most educated populations in the country. Trust us: we have seen the worst and the best, after decades of providing financial planning services to Washington-area residents.
And here’s a little tip from insiders who have reviewed the financials of hundreds of Washingtonians: you can’t tell how successful someone is at managing their personal finances by simply looking at their car, home, or social status. Even those who seem like the most successful among us make the same avoidable mistakes any of us can experience.
So let’s talk about the most common financial blunders DC-area residents consistently make–and how to avoid them:
1. We can’t get enough of a good thing.
Whether it’s tech stocks back in 2000, or real estate in 2008, Washingtonians have a knack for getting caught up in the euphoria of the moment. Maybe it’s our desire to keep up with the Joneses, or maybe it’s just that we think we’re smarter than everyone else. But what goes up must come down, and anyone diving face-first into the next big craze could be in for a big surprise.
But D.C. is a networking and relationship city. We all have friends who made it big on something: real estate, a community bank, or even a start-up. And these relationships allow for special access to people, events, or even to hot investments. When other investors hear someone of status talk about how much they have made through their own investment, it translates into confidence. They did, so why can’t I, right?
But the failures and flops in these areas of much more common than the success stories. It’s worth noting that special access is also something that got many incredibly smart Washingtonians caught up with Madoff’s Ponzi scheme.
Nowadays, the big focus seems to be private investments. Everyone has seen an idea for a startup they think will be the next Uber (whether it’s a stock or a friend’s business). However, just like it was dangerous to throw a ton of money into tech stocks or real estate, it’s dangerous to bet on an idea that could struggle and go belly-up.
When things look too good to be true, they usually are. Be cautious.
2. We don’t keep track of ourselves.
When we’re not working, we have social and family obligations–we’re so busy. Most of us spend too much of our lives sitting in beltway traffic.
That leaves less time for Washingtonians to keep track of what they own and what they’re spending. Many Washingtonians don’t have any clue about how their investments have performed. They also don’t know what to make of the convoluted brokerage statements their financial advisors send along, which require a huge spreadsheet and hours of time to interpret. Most people also have no clue what kind of money they’ll need in retirement.
For example, we recently asked a couple how much they thought they would need to spend each year when they retire. After days of debating, they came up with a ballpark number. When we asked if that figure was pre- or post-tax, they had no idea–not realizing what a big deal that distinction really is.
The good news is that when it comes to tracking your spending, technology has come so far in recent years. Tools like Quicken or Mint.com can automatically track and categorize budgets and accounts. That means that if you aren’t already keeping an eye on your spending, there’s no longer any excuse.
3. We cash out at the worst time.
No one should let their emotions drive their investments. But, inevitably, we all do. Most investors are spectacularly bad at timing the stock market. In fact, Morningstar estimates that poor market timing costs investors 2.5% per year. Investors see something scary and run–whether it was the bear market of 2008 or a rapid and unexpected selloff like we recently saw after the Brexit vote.
But letting emotions get in the way of intelligent investment decisions can have extreme financial consequences. For example, investors who freaked out and sold the S&P at the 2009 low missed out on over 262% in subsequent growth through June 2016. Too many are still waiting in cash for the market to drop again before investing.
Many investors also like to ignore the boring stuff–bonds, cash, money markets–when times are good, even though the boring stuff belongs in everyone’s portfolio along with stocks.
By letting emotion drive their decisions, most investors aren’t doing better than the stock market; they’re shooting themselves in the foot when the prudent course is to choose a diversified portfolio and stick with it in good times and bad.
4. We ignore good advice.
D.C. is a town of consultants. Many of us use consultants or earn our living consulting for others. And yet, many individuals have resources at their disposal (and pay for them) that they completely ignore.
For example, your CPA doesn’t yearn to be a data processor for your W-2s and 1099s. Your accountant is trained and prepared to be a consultant, which means they want to talk through your financial situation and brainstorm creative ways to help you make the right tax deductions. Don’t wait to do this on April 14th when they’re swamped. Rather, your CPA probably has downtime in the summer or fall to meet and discuss your situation in depth. Making time for this type of meeting often pays for itself.
Even if someone has a mountain of wealth, they can still manage to botch their will and estate plan–especially when they ignore the advice of their attorney. The problem is that we use one of DC’s many lawyers to draft our documents, only to shove them in a filing cabinet and forget about them for years. That’s a mistake. Your goal should be to review your will and estate plan every couple of years–or any time you experience a major life change. It also makes sense to get a professional’s advice, especially from someone on the Washingtonian’s Best Estate Attorney List. You can even go online to a resource like LegalZoom.com to craft a more barebones solution.
5. We bet the farm.
We’ve seen numerous Washingtonians try and become the next Warren Buffet by consolidating all their bets in a single investment. But even titans of industry like Warren Buffet diversify their investments. Here’s a rule of thumb: if a person’s entire net worth–401(k), stock options, and income sources–all depend on a single company’s success, they’re not properly diversified.
Just ask top employees at WorldCom who invested the majority of their 401(k) in the company’s stock, when other investment options were available. When WorldCom went bankrupt, not only did those people lose their jobs and income (with very little severance), but their savings were almost entirely wiped out as well.
These are some of the worst money mistakes we’ve seen Washingtonians making in our years as one of Washingtonian’s best financial advisors. The good news though, is that these mistakes are all avoidable. The biggest challenge to overcome is learning the right questions to ask to avoid these mistakes in the first place.
Every quarter we share 5 questions we believe everyone should be asking their financial adviser to help avoid these financial missteps. Visit GlassmanWealth.com/Answers to learn the most important questions you should ask your advisor now.