Apple Computer founded on April 1, 1976, by Steve Jobs and Steve Wozniak. What’s less well known is that originally there was a third co-founder, an engineer named Ronald Wayne. Wayne’s tenure at the company was short, though. Concerned by the risk—and by Jobs’s personality—Wayne sold his stake in the company after just 12 days.
In exchange for his 10% stake, Wayne received $2,300. Today, Apple
AAPL,
is worth close to $3 trillion. Wayne’s decision to sell is sometimes cited as one of the worst missteps in financial history.
It’s hard to judge him, though. “Nobody could have anticipated how big Apple would become,” Wayne has said. This, in fact, is the reality with many financial decisions. Seeing Apple today, Wayne’s error seems monumental, but he had no way of knowing what would happen. It’s only with hindsight, nearly 50 years later, that we can deem it a mistake.
Many financial decisions, however, don’t require hindsight. Below are 11 common financial mistakes that are mostly avoidable.
1. Over allocating to illiquid assets. In 2008, Harvard University’s endowment found itself in a bind. On paper, it was worth $37 billion, but it was facing a cash crunch. It had overcommitted to private investment funds and real estate, which offered no liquidity precisely when the university needed it most. This led the endowment to offload some of its assets at fire-sale prices.
While this is an extreme example, the same dynamic can affect individual investors. Like Harvard, it’s easy to ignore the risk of illiquidity when markets are going up, which is why—if you hold nonpublic investments—it’s important to have a plan for navigating a potential downturn.
2. Over allocating to a single asset. The market today is dominated by the so-called Magnificent seven tech stocks. If you own one of these, that’s great. But it can also pose a risk—because it may now represent an overly large percentage of your portfolio.
The simple solution is to sell the stock—or part of it—and diversify. But you might worry about the tax impact. It’s also natural not to want to walk away from an investment that’s done so well. This is called recency bias. A good solution: Don’t view selling as a binary decision. Instead, try to whittle down big positions over time.
3. Choosing interesting investments. As I noted recently, there are thousands of investment options out there. If you have a sizable portfolio, that can make it difficult to stick with a simple set of investments. It’s natural to want to explore more interesting terrain. According to the data, though, “interesting” investments tend to be less profitable than their more boring peers.
4. Not carrying umbrella coverage. For many people, insurance is a tedious topic, which is why they tend to put this part of their financial life on autopilot. But it’s worth reviewing your coverage each year. Confirm, in particular, that you carry umbrella insurance on top of your home or auto policy. Because it’s designed to protect against unlikely events, umbrella policies tend to be inexpensive.
5. Paying too little tax. This might sound counterintuitive, but when you arrive in retirement, it’s important to be intentional about your tax bill. Sometimes, in the first years after retiring, folks are so excited to be in a low tax bracket that they overlook a key opportunity. Taxable income tends to increase again—sometimes sharply—after age 70, thanks to Social Security benefits and required minimum distributions from retirement accounts. It can be a mistake not to draw some money out of tax-deferred accounts during those earlier, lower-tax years.
6. Using cash for charitable gifts. Do you have stocks or other investments with unrealized gains in your taxable account? If so, don’t overlook the value of a donor-advised fund (DAF) for charitable giving. When you move appreciated shares into a DAF, they can be sold tax-free, making the entire proceeds available for charitable gifts. That’s why it’s almost always better to give this way, rather than with cash.
7. Acting on market forecasts. Do I follow market news and commentary? Absolutely. But do I use it to inform investment decisions? Rarely. How to explain this seeming inconsistency? The reality is that most market events are short term in nature, but most people’s financial plans are built around the long term. That’s why you wouldn’t want to put too much stock in the advice of market commentators.
8. Acting on anecdotes. Why do we enjoy watching movies or reading books? Because stories are compelling. But when it comes to investments, this can pose a risk. It’s fairly easy to tell a convincing-sounding story about most any company. The trouble, though, is that stocks are driven by a mix of news, data and investor opinion—and it’s hard to know how these factors will combine to impact share prices. That’s why it’s a mistake to put too much weight on any given anecdote.
9. Acting in response to recent events. The value of a company’s stock should, more or less, equal the sum of its estimated future profits—this year, next year and every year into the future—so you shouldn’t put too much weight on recent events. Suppose an auto company is contending with a costly recall. Yes, that matters, but probably only to near-term profits. If a company will still be in business 20, 30 or 50 years from now, a dent in one year’s profits should have only a small impact on the stock’s overall value.
10. Acting in response to political events. It’s an election year, and that always gets investors wondering—and worried—about the impact of political events on markets. The fact is, though, that markets have risen under both parties. Indeed, the best market results have been during periods when the White House and Congress were controlled by different parties. The upshot: Investors shouldn’t let their happiness or unhappiness about election results color their financial decisions.
11. Paying too much for college—as a parent. The right college education can deliver a positive return on investment. But it’s important for parents to recognize that this benefit accrues to the child, not the parent. While we all want to help our children, it’s also important to check the numbers. It’s OK for children to take on some debt if the alternative is for their parents’ finances to be stretched too thin.
Ronald Wayne is philosophical about his experience with Apple. “Should I make myself sick over the whole thing?” he asks. “I didn’t want to waste my tomorrows bemoaning my yesterdays. Does this mean I’m unemotional and don’t feel the pain? Of course not. But I handle it by going on to the next thing. That’s all any of us can do.”
To be sure, no one gets every decision right. But that makes it all the more important to avoid missteps wherever possible.
This column first appeared on Humble Dollar. It was republished with permission.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth-management firm. Follow him @AdamMGrossman.