My Biggest Money Mistakes and How You Can Avoid Them

Note: I am not a financial advisor. I have not a single financial credential to my name. I am neither a CFP nor a CPA. My degrees are in English literature and Jewish Studies. I know nothing about your financial situation and even if I did, I am in no position to tell you what you should do with your money or your life. The following is for entertainment purposes only. You and only you should do you (perhaps with the help of a financial advisor whom you do NOT pay a percentage of your assets under management.

Like many I grew up knowing little to nothing about how to manage money or invest. My parents showed me the very basics. I had a savings account as a teenager (the balance was recorded in a little book that was updated when you when to the bank). I was taught that credit card debt was a most grievous sin and that you should spend less than you earn and that was about it. My parents had money trauma from the Great Depression burned into their DNA from their parents who had lived through it. The only thing they “invested” in were FDIC insured bank accounts and Certificates of Deposit. I learned through trial and often, as you will see, through error.

I got a checking account when I went to college and taught myself how to reconcile it from the directions on the back of the statement. I never gave investing a moment’s thought until at the age of 26 I had the opportunity to begin making contributions to my organization’s 403(b) retirement account. A rep from the firm came in and gave me and my co-workers a presentation on the various investment options offered and noted that she had all her money in the “High Growth Fund.” High growth sounded good to me, so that is what I did with the $20 per paycheck that came out of my salary. Later the organization also made a contribution on my behalf.

Thus began my little hobby of trying to grow a nest egg for a retirement date that seemed very, very far away. Early on I read a few books, like a Wall Street Journal primer on personal finance and The Only Investment Guide You’ll Ever Need, by Andrew Tobias and I tried a bunch of stuff some of which worked and much which didn’t. Here is a list of four worst money decisions I made and one more that while bad on paper, I am still glad I did. So (as they say on the YouTube vids) let’s get into it!

1. Buying Individual Stocks

Early on in my investment journey I thought myself a genius who could pick winning stocks. I tried many methodologies: value investing (buying companies the stock price of which is low compared to its earnings), growth investing (buying companies that seem to be growing rapidly), and the “walk around the mall and see where the teens are shopping” strategy. These were all abject failures. Most of these stocks I later sold at break even or a loss. Here are some of the stocks I owed at one point or another: Alcoa Aluminum, IBM, American Airlines, Lands’ End (before it was bought by Sears) and lots of others. Fortunately, I was protected from my abysmal instincts by the fact that I couldn’t invest in individual stocks in my 403(b) plans. I was restricted to my modest brokerage account and my Roth IRA.

Eventually, I learned that I had no talent for picking individual stocks and that I would never have access to the kind of information that large money managers have which give them a leg up. I realized that I would be better off just investing in mutual funds and leave the investing to those smarter than I. When I came to that conclusion, I sold all my individual stocks. Except one. I kept the one not because I expected it to do anything. The company was in shambles and looked like it might go out of business. The founder had been brought back in a last-ditch effort to save the company, but no one gave him great odds. I kept the stock because owning it was part of my identity. Perhaps the worst reason for owning a stock there is.

2. Using Actively Managed Mutual Funds

As I said, I finally realized that I should leave the investing decisions to those smarter than me and I began investing in mutual funds. Mutual funds are big pools of money and investors that buy lots of different things. Each fund manager has an idea or a philosophy that guides their decisions and if he or she is right, the individual investors make money. These are called actively managed funds. Well, it turns out I was wrong. Not about my conclusion that I was a horrible stock picker; I was quite right about that. I was wrong in thinking there were those who were better than I. It turns out over the long term (ten years or more) virtually no actively managed funds beat the market.

John Bogle looks at this in depth in his Little Book of Common Sense Investing. This book is one of the best books on investing and perhaps the only book on investing you ever need (sorry Mr. Tobias) but if you don’t have the time or patience to read even one, here is the take away: No actively managed fund will do better than the market as a whole in the long run so just buy the market as a whole. Enter passive funds. Passive funds surrender the decision making to an algorithm that simply replicates an existing index like the S&P 500. In other words, if you invest in an S&P 500 Index fund, you returns will replicate the performance of the S&P 500 year in and year out. Does that mean you will make money every year? No. It does mean you will match the performance of the market over time and in most lifetimes of investing that ‘average’ return will be sufficient to meet your goals assuming that you are saving and investing enough. And you will beat almost every kind of investment there is from bonds, to gold, to real estate. Eventually, I figured out average was good enough for me and I got out of active funds and into low-cost passive or index funds where I have been ever since. Low cost means that the company who manages the fund takes a very tiny amount for their work of managing the fund. For example, some of my funds charge just .06%. Compare this to many actively managed funds that can charge 1% or more. 1% doesn’t sound like a lot but over time paying 1% in fees versus going in your pocket can be tens or hundreds of thousands of dollars when you take compounding into account.

3. Thinking It is Always Better to Buy Than to Rent

In 1988, believing that we were “throwing money down the drain by renting” my wife and I bought a one-bedroom condo (really a coop). We bought it knowing that we were planning to have children soon. The price was too good to be true (We later learned why. Coops were very hard to finance and therefore to sell) and we grabbed it thinking we’d sell it for a tidy profit in a year or two and move up to a house. Two years later with one child and another on the way and a coop we couldn’t sell, we bought a house and rented out the coop. Being a landlord was a huge pain and went on for years until we finally sold the thing at a loss to a nonprofit housing corporation. Renting can often make more sense than buying unless you are pretty sure you are going to stay put for seven to ten years. We’ve been in our current house 25 years and even now after considering the interest we paid on the mortgage, the cost of maintenance, and the opportunity cost (of investing) I am not sure it was a good decision from a purely financial perspective.

4. Jumping In and Out of Bond Funds and Chasing Yield

For most of my working life, I invested only in equity funds, that is active or index funds which bought stocks rather than fixed income investments like bonds. But as I got into my 50s it seemed prudent to add some bonds into the mix. At the beginning I bought an index bond fund without really understanding how they work. What didn’t realize was that as interest rates rise the value of bond funds fall and vice versa. As interest rates rose in the mid-2010s, I saw the price of my bond fund fall and was rattled I was buying bonds to avoid volatility! What I didn’t understand was that though the price of the fund was falling it was because it was paying larger and larger dividends.

So, I sold the bond fund and built a CD ladder instead. Of course, as soon as I did that interest rates reversed and each time a CD rolled over it was generating less interest than before. Finally, during Covid when rates sank to near zero, I was getting close to nothing and looking longingly at the bond fund which had soared and was still paying more than 3% annually. Finally, I understood the pros and cons of bonds fund. As my CDs matured I bought back into the index bond fund and am staying put! It was an expensive lesson. As long as you are buying and holding, an indexed bond fund will match the return of its index and do as well as individual bonds over time with a lot less effort. If you don’t need to sell it anytime soon, the short-term price fluctuations shouldn’t worry you.

5. Paying Off My Mortgage Faster Than I Had To

My last mistake wasn’t exactly a mistake. That is I knew while I was doing it that it didn’t make financial sense and I did it anyway. The spreadsheet said no. My brain said no. But my instincts told me to do it anyway. I paid off our home faster than I had to.

We bought our current home in 1999. At the time, I had quit my well-paid full-time job to go to graduate school. I was working about 3/5 time making a fraction of what I had been making at the trade association. My wife was also working part-time as she had been since the kids were born. We could barely afford to make the payments on the house. But a year later I returned to full-time employment and as interest rates continued to fall, we refinanced our mortgage not once but twice. After the second time our interest rate was around 4.5 percent. It was a decent rate and after deducting the interest from my taxes, the effective rate was probably in the threes or even twos. My investments were generally returning way more than that so what I did made no sense. I paid off my 30-year mortgage in less than 15 years.

We made the last payment on our Mortgage sometime in 2013 and it was accompanied by an incredible sense of freedom. The next year, I quit my job (again!) and took another paying a fraction of what I had been making. This time there was no financial stress. On paper it had made more sense to keep paying the scheduled payment and invest the difference, but the sense of freedom after making the last payment was worth whatever it cost me. I am in no way saying this is the right move for everyone, but I have no regrets. We’d still be paying that original 30 year note today if we hadn’t accelerated the payments. Instead we’ve been mortgage free for 12 years.

In spite of these missteps, we came out alright. I retired (mostly) at 58 and my wife two years later. I guess we did more things right than wrong. Here are a few mistakes we didn’t make.

• We never borrowed except for a house and our first few cars (those were low interest factory incentive loans we paid off quickly). We never had any credit card or any other consumer debt.

• We never paid someone a percent of our assets to manage our money.

• We always lived well below our means saving at least 20 percent of our income (in later years up to 50 percent) and maxing out our retirement accounts every year that we could.

• We avoided “lifestyle creep” and live today pretty much the way we did when we were young and broke and yet I can’t think of anything that I want that I can’t afford. (Lack of imagination?). Small luxuries are everything. For many years, travel meant sleeping in a tent. Today we sleep in our minivan!

Still, lots of people do “all the right things” and still find themselves scraping by. Credit must be given to a large amount of luck as well. For example, that one stock I held on to when I sold everything else and moved into index funds, as you’ve probably already guessed, was Apple. I bought a handful of shares shortly after Steve Jobs returned to the company as it teetered on the brink of disaster. I reinvested the dividends and even added to my position a few times. That little gambit resulted in the highest return of anything I invested in over the last 38 years -- far out pacing the S&P 500.

Stupid. Irrational. Dumb. Luck.

The world’s a narrow bridge; fear nothing.