Money! It probably crosses your mind at least once a day. Maybe you think, “Yay! I have loads of it!”. Or maybe you think, “Crap, I need loads of it!” I’ve been on both sides of the spectrum. I want to share an experience I hope will keep you from making the same financial mistakes I just did.
Disclaimer: I take complete, 100% responsibility for my financial life and I expect you to do the same. I am not a certified financial planner and I don’t play one on the internet. Now on to the lessons!
So, I had an extra chunk of change just sitting around in a savings account about a year and a half ago that was earning very little interest. I knew I wanted to grow this small investment. But, I really didn’t know what to do with it in the current market and I was unwilling to do the research to figure it out at the time. So, I turned to someone at a national financial institution who had been taking care of a family member’s money for over a decade. He advised me to get into a particular investment based on my goals and I handed over my cash. I checked it periodically but I was busy. I’m a professional actor and producer, I don’t want to have to follow the financial markets. When I had a concern I called my advisor and he assured me things would get better. “It’s going to swing back up”. ” Trust me”, he said. So, I did. This pattern went on for about a year and a half. Last week I decided that I was fed up and pulled that investment from the market. What did I find? I found that my portfolio lost 25% of it’s value! What the hell happened?! I told him what my goals were. I voiced my concerns. I followed his advice! What the hell happened!?!!?
What I did right:
I had an extra five figures to invest because of a few good habits.
1. Pay yourself first from every dime you earn. This is an old, time tested rule and for good reason. Start by saving just $5 a week or 5% of your net earnings and increase the savings from there as soon as you are able. Compound interest is your best friend! You could start by putting this in a high yield savings account. It might just barely outpace inflation but at least it’s not going anywhere. Presuming you are debt free I recommend setting aside enough cash for a 3-6 month “emergency fund” to help you through the rough patches in life. If you are not debt free, get debt free and still pay yourself first. Everything after that should go toward paying your bills and purchasing assets. An asset is something that puts money in your pocket. A liability is something that take money out of your pocket. Read “Rich Dad, Poor Dad” to learn more about this concept.
2. Automate your expenses. All of my expenses are on auto pay. I set them and forget them. I use Mint.com to put all of my finances in one place so I can have a bird’s eye view of my financial life every week when I review it. Also, I put all of my expenses on a credit card with great cash back or points/rewards. Currently I’m using the Chase Sapphire Preferred card. I highly recommend it. Therefore every time you buy something you are getting something in return. You will also be building your credit score which will help you down the line when you want to buy a house or a car. Pay the full balance off EVERY month. I repeat: Never carry a balance. Too much consumer debt is the number one dream killer out there. Don’t go into credit card debt.
3. Live below your means. Do you like that $4,000 couch made of recycled jeans? Yes! Do you need that $4,000 couch made of recycled jeans? Probably not. Head to CB2 and get a great sofa for a fraction of the price instead. Buying too much overpriced “stuff” is a surefire recipe for financial ruin. Until you’re a series regular on a hit network television show that’s been running for four years you need to keep your expenses in check. The financial highs from bookings in entertainment can be followed by deep valleys of unemployment. Be prepared. I was in acting class with a guy who had been a series regular on a new TV show. He bought a condo during the filming of the first season when he was making great money. A year later the show was cancelled, he was unemployed, and his house payments were due. He had to go back to offering personal training sessions just to make ends meet. But, had he saved or invested that windfall from the first season and spent below his means he could have been living off of that cash and been available for the auditions he missed instead of training one of the Housewives of Beverly Hills. Live below your means or enjoy a day job forever. Your choice.
What I did wrong:
I lost money because of a few bad mistakes.
1. I was unwilling to do the research. No one cares about your money like you do. Not even the people that get paid to take care of it for you. Whenever you receive financial advice from someone working at a financial institution remember that they will make money from your money whether or not you do. Hidden within your financial contract with them are fees that will go to them regardless of your financial success or failure. Tony Robbins has a great chapter on these fees in his book Money- Master the Game. You just hope that the advice you receive nets you more than enough money to pay those fees and then some. If I had done my research I would have realized that my money was going to be put into an investment vehicle that I didn’t understand. I didn’t know what made my money go up or what made it go down. I let someone do the research and I paid dearly for this mistake.
2. I didn’t trust my gut.-Just writing this makes me sick because I am usually so good at following my intuition. I knew that my account balance was going the wrong direction pretty early on. I reinvested the dividends every month on his advice and yet my account rarely went above where it started. Instead of looking at the data I trusted the advice of someone who was supposed to know more about the market than me. But, he didn’t have a crystal ball. Honestly, no one knows exactly what’s going to happen with the financial markets. Remember that. He got to play with my money, make money off of it and I got stuck holding the bag. The much lighter bag…
3. I didn’t do enough due diligence-As I mentioned my financial advisor had been a family member’s financial advisor for years back home in Iowa. Plus, a dear friend of my family member had worked with him in my hometown for years and years. They had been loyal and trusted him with their money. Shouldn’t I? Once I started to lose money I asked my family member how her investments were going. Well, what do you know. She had lost money. A lot of it in fact. I’m sure part of that was due to the market crash of ’08 but the rest was due to poor advice she had received. I should have asked more questions of her experience from the start. I should have looked at the numbers and the data. My family member was so loyal to this guy that she was willing to take a financial hit and sweep it under the rug. “Well, I don’t know who else to turn to”, she said. That may have been true at the time but that laziness around financial decisions is still costing her money to this day. What I’m getting at is that a recommendation is just a starting place. Once you have that you must look into the person or the deal on your own and make your own judgements. Trust the numbers. They do not lie. Had I seen his past performance I would have gone elsewhere.
4. I didn’t act soon enough when things went wrong- After a few months I knew the numbers were headed the wrong direction. But, I took my financial planner’s advice repeatedly instead of trusting my gut. I let the numbers continue on a downward spiral instead of standing up for myself and getting out. I was afraid that by getting out of this investment early I was missing out on the potential gains. As my investment’s value plummeted I was banking on a market correction that would change the direction my portfolio was headed. That day never came and I watched my money disappear. Had I pulled out earlier I would have only been down maybe 5%. But instead I lost another 20% and more importantly all of the TIME my money could have been somewhere else growing!
5. I didn’t have rules-Set your rules for an investment ahead of time. As Mike Tyson said, “Everyone has a plan until they get punched in the face”. If I had decided how much I was willing to lose ahead of time I would have gotten out when I hit that point. How much risk are you willing to take on? If you are younger and looking to invest for retirement you can probably handle a little more risk early on. Your asset allocation will become less aggressive as you near retirement age. If you are saving up in the short term for a fishing boat, put that money somewhere relatively safe so you don’t end up having to buy a paddle boat instead. Your goals will dictate your level of risk and so will your emotional resilience. If you are someone who stresses out every time they see their investment fluctuate then put your money someplace safer. You’ll sleep better at night. Trust me.
So, this article cost 25% of that portfolio to write. Ugh…
Warren Buffet’s number one rule of investing is “Don’t Lose Money”. His second rule of money is “See rule number one”. Though that is simple advice, it’s really all the advice you need to get started. Losing money sucks. Don’t do it. I hope reading about my experience can help you make better decisions than I did. Pay yourself first, Automate your expenses, Live below your means, Do the Research, Trust your gut, Do due diligence, Take action when things go wrong and Set rules ahead of time.
In the comments below, let me know what financial habits have contributed to your success and what financial mistakes you’ve had to overcome.
All my best,