Fool Me Once…

Ah, April 1st— a day to reflect on all of the foolish things that people do to themselves when managing their finances. Although there are a myriad of challenges and uncertainties in today’s economy and markets, some of the biggest money mistakes are self-inflicted. To honor the day, here is a brief list of some of the foolish things that investors do from time to time.

1) “Non-management” of your investments. You may be a highly motivated person who loves diving into the financial pages and creating a spreadsheets for tracking your assets. If so, you are in the minority (and probably an engineer!) Most people barely have the time to balance their checkbooks, let alone determine the most appropriate allocation for retirement accounts. Even if you like the analysis part of investing, it is hard to have the discipline necessary to be a dispassionate investor. If you are not really managing your money or are ruled by your emotions, then you have two choices: create a system or get some help. Either one requires some work—sorry!

2) Buying high and selling low. For some reason, no matter how many booms and busts that we live through, it seems easier to buy an asset when it has already increased in value then when it plummets. Just because something has gone up or down for a while doesn't mean that it can’t reverse course. If you become a bit more contrarian, you may find that it is easier to sell when assets are rising and buy when they drop.

3) I don’t want to take a loss-itis. There is an irrational tendency to keep loser positions to avoid taking losses. One way to check is to pose the following question: would I choose to purchase the position right now? If the answer is “no way”, get rid of it and move on—there are far too many opportunities that abound in the marketplace to cling needlessly to a loser. The secondary application of this advice is directed to friends who are in bad relationships!

4) Wearing rose-colored glasses. Investors are generally an optimistic bunch. This can be a worrisome tendency, because a healthy dose of pessimism can sometimes open your eyes to risks that exist. See item number two for proof of what over-optimism can lead to!

5) There is no secret. Turn off Cramer and stop buying get-rich-quick books. Reaching your financial goals over the long term requires saving and investing wisely and not falling prey to the carnival barkers who promise the world. Turn down the noise and stay on your path.