10 common financial planning mistakes

Financial planning mistakes
Photo by Matthew Guay

Investors faced with a New Year and new opportunities to gain — or to lose — should avoid the 10 most common financial planning mistakes.

It is not enough to want to make money. You need to understand what the money is for and what time is allowable for realizing goals. Failure to do that is the foundation for many other errors.

Here are 10 common financial planning mistakes, financial planners report year after year.

Lack of a financial plan

There is a difference between an intention, like wanting more money, and a road map for getting it. The map is a series of choices that one needs to make to reach the goal. The choices include allocation money, for example, between debt repayment and retirement savings.

The investor has to have a plan; without it, he can get lost in the jungle of choices.

Giving too much weight to tax minimization

People are diverted by tax planning from the fundamental problem of making money. Tax administration always is a subsidiary to the basic problem of finding profitable investments.

Failure to appreciate the risk of making particular investments or in not being sufficiently diversified

Capital markets have a great deal of embedded risk. It is the job of the investor or his advisor to find it and weigh it in making his plans.

Bargain hunting for the wrong reasons — buying things because they are down without appreciating why they are down

You have to look at fundamentals and then analyze the current price and what the future may hold for the stock or bond or other assets. It may be cheap for a good reason.

Hubris

It is wrong to put ego ahead of your judgment. You can come up with a thesis about a stock and refuse to change it even though fundamental developments demand a change in attitude.”

Chasing famous names

Don’t chase famous names because they are famous and don’t ignore signs of developing crises on the theory that a company is too big or too prominent to fail.

Lack of clear goals

The investor who is not sure what he is investing for is at more risk than if he had a definite profit in mind. The old saying that if you don’t know where you are going, you may not get there. And that means having target prices, stop-loss orders, or a plan to add to a position if a stock or other assets that are worth having drops in price.

Driving your portfolio forward by looking backward

Mutual fund sales brochures warn that future performance may not reflect past performance. Indeed, it is about as likely that the returns for a stock or a fund will return to average performance for the group it’s in after an exceptional year. What really counts is fees and structure of investments — not last year’s performance.

Failing to observe and weigh the costs of an otherwise good investment

In mutual funds, costs are sales commissions and management fees, in bonds, it is the spreads between the price the dealer pays for the bond and what he sells it at, and in many tax-management devices like petroleum flow-through shares and junior mining offerings, the costs can be deferred to cash calls. The investor has to know his costs.

Taking on more financial services than required

A lot of people get sold on financial products they do not need. They get complex mutual funds with life payment options they do not require — all of which have fees embedded… Buy what you need and understand what you buy. That is a huge rule that many people break.