Apple Computer was founded on April 1, 1976 by Steve Jobs and Steve Wozniak. What is less known is that there was originally a third co-founder, an engineer named Ronald Wayne. However, Wayne's tenure with the company was short. Concerned about the risk and Jobs' personality, Wayne sold his stake in the company after only 12 days.
In exchange for his 10% share, Wayne received $2,300. Today, Apple AAPL,
It is worth nearly $3 trillion. Wayne's decision to sell is sometimes referred to as one of the worst mistakes in financial history.
But it's hard to judge. “No one expected how big Apple would become,” Wayne said. This is actually the reality with many financial decisions. Looking at Apple today, Wayne's mistake seems enormous, but he had no way of knowing what would happen. We cannot consider this a mistake until nearly 50 years later.
However, many financial decisions do require hindsight. Here are 11 common financial mistakes that can mostly be avoided.
1. Over-allocation to illiquid assets. In 2008, the Harvard University Endowment found itself in trouble. On paper, it was worth $37 billion, but it was facing a cash crunch. It was overcommitted to private equity funds and real estate, which did not provide liquidity precisely when the university needed it most. This led the endowment to sell some of its assets at low prices.
While this is an extreme example, the same dynamic can affect individual investors. As with Harvard, it's easy to ignore the risk of illiquidity when markets are rising, which is why — if you have non-public investments — it's important to have a plan to weather a potential downturn.
2. Over-allocation to a single asset. The market today is dominated by the so-called seven great technology stocks. If you own one of these, that's great. But it can also pose a risk – because it may now represent a very large percentage of your investment portfolio.
The simple solution is to sell the stock – or part of it – and diversify. But you may worry about the tax impact. It is also normal to not want to walk away from a well-executed investment. This is called recency bias. Good solution: Don't look at selling as a binary decision. Instead, try to reduce large positions over time.
3. Choose interesting investments. As I recently pointed out, there are thousands of investment options available. If you have a large portfolio, this can make it difficult to stick to a simple group of investments. It's natural to want to explore more interesting terrain. However, according to the data, “interesting” investments tend to be less profitable than their more boring counterparts.
4. Do not carry an umbrella cover. For many people, insurance is a boring topic, which is why they tend to put this part of their financial life on autopilot. But it's worth reviewing your coverage every year. In particular, make sure you carry comprehensive insurance on top of your home or car insurance policy. Because they are designed to protect against unexpected events, umbrella policies tend to be inexpensive.
5. Pay very little tax. This may seem counterintuitive, but when you reach retirement, it's important to be intentional about your tax bill. Sometimes, in the first years after retirement, people are so excited to be in a low tax bracket that they ignore a key opportunity. Taxable income tends to rise again — sometimes sharply — after age 70, thanks to Social Security benefits and required minimum distributions from retirement accounts. It may be a mistake not to withdraw some money from tax-deferred accounts during those previous low tax years.
6. Using money for charitable gifts. Do you have stocks or other investments with unrealized gains in your taxable account? If so, don't ignore the Donor Fund (DAF) value of charitable giving. When you transfer appreciated shares to a DAF, they can be sold tax-free, making the entire proceeds available for charitable gifts. For this reason, it is always better to donate this way, rather than cash.
7. Work on market forecasts. Do I follow market news and commentary? definitely. But do I use it to inform investment decisions? Scarcely. How do we explain this apparent contradiction? The truth is that most market events are short-term in nature, but most people's financial plans are built for the long term. That's why you don't want to put too much stock in the advice of market commentators.
8. Acting on stories. Why do we enjoy watching movies or reading books? Because stories are compelling. But when it comes to investments, this can pose a risk. It's very easy to tell a compelling story about most companies. But the problem is that stocks are driven by a combination of news, data, and investor opinions, and it is difficult to know how these factors will combine to affect stock prices. This is why it is wrong to give too much importance to any particular story.
9. Act in response to recent events. The value of a company's shares should equal, more or less, the sum of its estimated future earnings — this year, next year, and every year in the future — so you shouldn't place too much weight on recent events. Suppose an automobile company is facing a costly recall. Yes, this is important, but perhaps only for near-term profits. If the company is going to be in business 20, 30, or 50 years from now, one year's decline in earnings should have only a small impact on the overall value of the stock.
10. Act in response to political events. It's an election year, and that always makes investors wonder — and worry — about the impact political events will have on markets. But the truth is that markets rose under both parties. In fact, the best market results occurred during periods when the White House and Congress were controlled by different parties. The upshot: Investors should not let their happiness or unhappiness about the election results influence their financial decisions.
11. Paying too much for college – as a parent. The right college education can bring a positive return on investment. But it is important for parents to realize that this benefit accrues to the child, not to the parents. While we all want to help our children, it's also important to check the numbers. It's okay for children to take on some debt if the alternative is to significantly drain their parents' finances.
Ronald Wayne speaks philosophically about his experience with Apple. “Should I make myself sick over the whole thing?” Asked. “I didn't want to waste my tomorrow bemoaning yesterday. Does that mean I'm unemotional and don't feel pain? Of course not. But I deal with it by moving on to the next thing. That's all any of us can do.”
Of course, no one makes every decision right. But this makes it even more important to avoid mistakes wherever possible.
This column first appeared on Humble Dollar. Republished with permission.
Adam M. Grossman is the founder Mayport, a fixed-fee wealth management firm. follow him @Adam M. Grossman.
