Avoid these three money mistakes

Financial planner and New York Times blogger Carl Richards created a stir when he wrote How A Financial Pro Lost His House earlier this month. It was a gut wrenching true story of how he got caught up in the real estate bubble in Las Vegas and eventually lost his home via a short sale after the meltdown. It created quite the controversy in the financial planning community as planners debated whether he did a service to the public or hurt the reputation of the financial planning industry. I come down on the side that he did the right and courageous thing, since his willingness to share his experience gives us all the opportunity to learn from our mistakes. I've written about some of my blunders before and have to tell you that this pro had no trouble coming up with my biggest three money mistakes. So I'll match my friend Carl and raise him by two blunders.

Gold was going to make me rich

I bought gold in the last gold bubble back in 1979 with the college graduation money I received from my parents. I've written about this blunder before, noting I was sure I was going to be rich. Fast forward 32 years and I haven't even kept up with inflation. Had I put that graduation money in the stock market, it would be worth ten times the amount the gold is worth today.

My only excuse was that, back in 1979, behavioral finance hadn't yet been invented and I didn't realize I was merely following the herd. In hindsight, I came to consider this my best investment ever. Certainly not because it was all that lucrative, but rather because it taught a freshly minted college graduate who was ready to take on the world that he wasn't as smart as he thought. Further, it was the defining event that made me into the indexer I am today.

I bought way too much house

Though Carl may have lost his house, I bought too much house. My wife and I left Aspen, Colorado in 2000 and moved to Colorado Springs. While the two are only 100 miles apart geographically, housing prices could not have been more different. Houses were less than a tenth of the price of glitzy Aspen and utilities were dirt cheap at the time.

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I made the classic mistake of buying an enormous 6,000 square foot house with 20 foot ceilings for a family of three. I'd love to blame it on my wife, but the truth is that I was the one who fell in love with the house and drove the decision to buy it. Today, we are spending a fortune on utilities and maintenance for a house we would be lucky to fetch what we paid for it 11 years ago. The short-term pleasure I felt from owning the big house with the great view has long since passed. Anyone know where I could get a good price on replacing a rotting deck?

The lesson I learned is that even real estate is a risky investment and the cost of maintaining it takes away from the pleasure of having a lot of space with a great view. I underestimated the value of simplicity and now, with our son less than five years from heading off to college, wish we had chosen to buy a small tract home with maintenance provided by a homeowner's association.

I bought stuff rather than experiences

Ever since I was a kid I remember that if I spent money on something like a movie or a concert, it would soon be over and I'd have nothing to show for it except a memory.  On the other hand, if I bought tangible stuff, I'd have it forever and be able to always enjoy it. It turns out that my logic was all wrong.

Life is about being happy and satisfied and all of the research shows that experiences have a far bigger impact on happiness than stuff. For a long time, I focused on the price tag and tended to skimp while on vacations or when attending a ball game or theater.  I mean, it's the same game or play regardless of where you're sitting, right?

Today, I'm loosening up and starting to splurge a bit with some seats near the 50 yard line and having the family swim with the dolphins in Cabo San Lucas, Mexico. The latter is a memory all three of us will cherish for a long time and discuss fondly.

This last mistake is something that will take me a long time to improve on. I'm pre-progammed to accumulate money, which happens to make it difficult for me to actually spend it. Money is stored energy and I'm having a hard time using some of that energy I've worked so hard to accumulate.  Yet I know I can't be buried with it.

Embrace your mistakes

If you think being a financial professional means you don't make money mistakes, think again. I applaud Carl Richards for being so upfront about how he lost his house and I have a long list of destructive money behaviors that often get the better of me.

It's easy to celebrate what we do right and even easier to blame others when something goes wrong.  It's a lot harder to embrace mistakes, talk about them openly, and make changes going forward.

Warren Buffett is the world's most successful living investor and he seems to have no issues discussing his biggest blunders. Perhaps he is such a great investor because he owned up to and learned from his mistakes. If your financial pro has trouble coming up with his money mistakes, you may want to be be a bit concerned.

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[The Dude 2009]

Can't Agree with the gold thing. if you bought it in 1979 you would be making about 500% profit selling now.

[somebody1122]

"Though Carl may have lost his house, I bought too much house."

oh puleeezz!!

how much of the house did carl OWN at the time he short sold it? he had NEGATIVE equity in it. we, the taxpayers, owned the house when he sold it for less than what he owed. he has not promised to make us - the taxpayers - whole after getting friends like you to sell his book for him.

you should be ashamed of him as a colleague. and you should be more ashamed of yourself for trying to help him sell his book.

- s.b.

[Allan_Roth]

Who appointed you judge an jury? Who do you think lost more on their house since the real estate peak? Are you implying I profit from his upcoming book?

I think you make emotional conclusions that aren't fact based.

[AskWhatNext]

Seriously Mr. Roth? You write "So I'll match my friend Carl and raise him by two blunders."

Are you seriously equating your three blunders with Mr. Richards' grave lapses in common sense?

Your investment in gold? Did you put every penny of your savings in that investment? Of course you didn't. Not every stock goes up, not every investment makes money. I hardly call that a mistake, it's simply the nature of investing. You bought too much house? So did Mr. Richards but his terrible decisions continued, yours stopped there. Buying stuff rather than experiences? Did you rack up so much debt doing so that you lost your home or filed for bankruptcy? Of course not because you didn't follow up one mistake with a series of bad decisions.

This article does two things. One, it shows just how severe Mr. Richards' "mistakes" were. Two, it shows the lengths Mr. Richards' followers will go to in order to minimize and justify their friend's horrible choices.

[rick_s_francis]

When I read the article I was very disappointed in Carl- I've read his site the behavior gap for a long time listened to some of his podcasts too. I thought pretty highly of him, he has a real knack for making cartoons that are clear and to the point about avoiding investment mistakes- I never expected him to make these same sorts of mistakes with his own house.

He said knew he could afford 350,000 but bought a $575,000 house. He went beyond buying too much house. He bought too much house he couldn't afford- a much more serious mistake. He compounded that by putting no money down and not calculating the impact to his finances. He is a financial advisor- he calculates financial implications for his clients all the time, why didn't he do it for himself? During this time he must have had clients that bought homes they couldn't afford-
He compounded the mistake by refinancing and underpaying his loans taking on an additional $200,000 on the mortgage. How did he ignore that his balance was growing year after year? After a few years he could have seen the writing on the wall and still sold for a huge profit.

He eventually sold for 92% of the original purchase price. If he had had any down payment or had kept up with the payments there wouldn't have been a short sale. He might have lost on the sale but investments are a risk.

I would actually be more sympathetic to him if he said he knew how leveraged he was and was intentionally using that leverage to increase the gains on his home. At least in that situation he would have been following a coherent, but risky strategy. The article makes him seem oblivious of what he was doing, and Carl is far too sharp for that.

-Rick Francis

[Allan_Roth]

Rick,

Thanks for the thoughtful comment. I can tell you that I was very skeptical housing prices would continue on a tear back in 2006 but I'd have invested very differently if I knew how bad it was going to be. I didn't.

I happen to be very conservative by nature and never liked using much leverage. Otherwise, I could see myself making the same mistake.

[tdullmaier]

When I read that story about the financial planner losing his REFINANCED house I thought to myself, "He won't be my financial planner!" If there had been something about health problems or other sudden unexpected expenses I would have been more understanding but it seemed to be plain old poor judgement and lust for immediate gratification.

Terry

[Allan_Roth]

Oldnassau67

I really appreciate you pointing out my typo. I think your comment illustrates two human biases.

Finding patterns out of randomness: You took one typo and extrapolated it to show I can't evaluate the future.

Confirmation bias: Rather than check my position on evaluating the future, you decided further data was not needed.

I urge you not to invest in this manner.

Thanks again for pointing out the typo.

Allan

[dp978]

If this web site had a 'like' button it would have been clicked!

:)

Great response Allan!

[oldnassau67]

The uncorrected typo - "he seem to have no issues..." in the article's last paragraph only confirms my belief that "financial planners" can evaluate the future as well as astrologers and haruspices.

[tdullmaier]

Mr. Roth is a financial planner who does not try to predict the future like many others do. I think if you follow his posts you'll be impressed by his honesty and intelligence.

Terry

[Allan_Roth]

Money is stored energy and what brings one persons pleasure and happiness is not the same for others.

I agree that there are simple pleasures that don't cost much.

[robertsgt40]

Actually, the pic says it all. Get your money out of the Fed's Ponzi schemed U.S. dollar. It's true fiat value will show itself when the time is right. Silver(bullion) is up 300% in less than 3yrs. The dollar will crash. Hello Zimbabwe/Weimar Republic

[tmittelstaed]

Don't be so quick to knock the tangible purchases. I bought a motorcycle years ago and I have enjoyed it many years. If I had simply rented a motorcycle to have an "experience" years ago I would have forgotten it by now.

I don't consider swimming with dolphins to be an experience I would treasure, either. Far too expensive and too short. What about spending 3 months during the summer driving through the US and looking at all the famous sites, camping along the way? Probably cost the same and far more memories.

My advice is if your going to spend a lot of money on an 'experience' it probably isn't worth having, the experiences that are treasured are life-changing ones, and are not automatically expensive. Many are quite cheap, the cost is in taking the time to have them. Ask the guy who took a year out of his life to bicycle across the US. He didn't spend a lot of money. What he spent is his time.

[dp978]

Agreed with everyones sentiments. I had posted a few times on Larry's pages about the aggrivation of finding the bloggers posts (especially when they started to merge your blogs with AP articles.) It actually stopped me from coming to the site, even though I really enjoy reading these sorts of posts.

Jack, I am glad you are giving them back there own pages, maybe consider doing what they did on the 'Sales Machine' blog and give these guys their own experts section. They definately deserve it.

Anyways, onto the article itself. I agree with many of your points, and will reflect upon my own life to see if I should be changing some of my patterns. I especially fall into the same category in regards to not spending my money, sometimes at the expense of added fun or memories. I am just getting into the swing of my career and am finally making a decent (to me) salary, but now no amount of cash looks safe enough or good enough. Its all about reaching the next goal of $X dollars.

-Derek

[Allan_Roth]

Derek,

I'm not sure what you mean when you say "now no amount of cash looks safe enough or good enough." Do you mean you want cash or cash is risky? Thanks.

[dp978]

Hi Allan,

This is more in regards to savings outside of retirement $'s. I always believed that once I hit X dollars in my savings account I would be happy and feel comfortable to spend a bit more on 'me' things. The problem is once I reach that plateau I now never want to get below it again and the bar moves higher. So, for example, I thought $10,000 in savings was a good buffer and I could loosen my belt a bit but once I hit that mark I realized I know was aiming for $15,000. Basically always thinking about saving, saving, saving... and never doing any discretionary spending.

It's the perpetually resetting bar. Tough to be content with things exactly as they are.

-Derek