A large percentage of people choose to do their own investing and financial planning. Like anything else, this isn’t necessarily a bad thing if it is done well.
The obvious question that arises is: Is it done well, and what are the most common mistakes that people make?
The list below isn’t necessarily a list exclusive to DIYers or even based on any studies; rather, it is the most common mistakes that I have witnessed over the past two decades.
Not having a plan
This is probably mistake #1. There are a number of reasons not to make a plan, but the simple fact is, if you want to accomplish anything in life, it’s helpful to have a plan.
It still amazes me that a family will spend weeks planning a vacation (or months if you are anything like my wife when planning a Disney trip), but they avoid doing any planning for retirement. You may have financial goals other than retirement, which is perfectly fine, but what is your plan to reach those goals?
Ignoring tax efficiency
Tax efficiency and not having a knowledge of tax law is probably number two behind not having a plan.
One of the first things to consider when investing is tax benefits or tax consequences of investments. Qualified plans offer tax benefits; annuities are taxed differently than other nonqualified investments. Bonds can be taxed differently than stocks. Indexes and ETFs may provide some tax benefits that mutual funds don’t. Long-term gains are taxed differently than short-term gains. All these things are essential to know before investing.
Other things that can help with tax efficiency are tax loss harvesting and charitable giving. These two things can help turn a taxable account into a more tax efficient account.
Letting emotion affect financial decisions
Emotions can have a huge impact on our investments, but they can also affect other financial decisions we make. The reason most individuals struggle to manage their own money is because emotion is involved.
According to Dalbar, individual investors lost over twice what the S&P 500 lost in 2018 (-9.42% vs -4.38%). Dalbar has done studies over longer time periods as well that tend to show individual investors trail the performance of major indexes.
The problem tends to be that investors want to buy when the market is doing well and sell when the market is low. The best example I can give is all the federal employees I talked to in 2009 who told me they just moved everything in their TSP to the G fund. To take the example even further, I heard from many in 2011-2015 who were still sitting in the G fund waiting to get back in the stock funds.
Emotion also plays a part in everything from retirement to everyday buying decisions. Retirement is a life-changing decision that should be made very diligently. Our daily buying decisions can have an impact on our financial wellbeing, and they can speed up or delay a possible retirement.
Simply put, when it comes to finances, we are better off leaving emotion out of our decision-making process.
Having little to no life insurance
My favorite reason for not having life insurance is “I don’t believe in insurance!”
I don’t care if you believe in insurance or not; if you love somebody, and if those loved ones depend on you, then you probably need life insurance.
This is really simple: if loved ones depend on your income to live, then buy insurance! Term insurance is very cheap coverage for a 10- to 30-year time period. I’m not implying you need to buy whole life or variable life, or any permanent insurance; rather, you can buy a term policy to cover a growing family. It could even be possible that a retiree who has been the sole income earner could need life insurance.
No succession plan
This is something many people never think about. It has been my experience that in most relationships, there is one person who handles the investments and the other person isn’t interested in finances. A perfect world would have both spouses involved and fully understanding the household’s finances, but that isn’t reality.
If one person controls the finances and investments, then it would be prudent to have a succession plan in the event of that spouse’s premature death. The surviving spouse needs a plan of implementation or at the very least a financial contact in case of emergency.
This is something I have written about many times, but delaying distributions may not be the best course of action. Retirees typically delay retirement distributions for two reasons:
- They don’t need the income
- They are afraid to start taking distributions
Having a solid plan in place can give retirees the confidence to take retirement distributions. The fear of running out of money can be scary, especially without reassurance from a third party. It may be best to start taking distributions and spending, gifting, or even converting some assets to a Roth IRA.
These decisions may resonate with some people while others may disagree, but please keep in mind this is my list. The mistakes above are ones I have seen occur multiple times with people I have either worked with or who have chosen to share their situation with me.