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A Money Man's Biggest Financial Mistakes

A financial planner reveals his biggest errors and what he learned

Financial planners biggest money mistakes

Jeff Minton

Financial planner Allan Roth bares all on his greatest top money mistakes — and lessons he learned from them.

Most of us love to win. But the truth is, failure is a far better teacher than success. We all make mistakes, including money errors. Even financial planners like me make them. We just don't tend to talk about it. Let me instead share five of the most notable money missteps of my life. I hope you can benefit.

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The sure bet on oil

While getting my MBA back in 1982 at Northwestern University, I was convinced that oil would soon be valued at over $100 a barrel. That clarity was based on simple and undeniable arithmetic and economics. There was only a finite amount of oil in the ground, and we were using more of it every day, both in the U.S. and in developing nations. Only a startling alternative source of energy could make my prediction wrong, and I was pretty sure the rumor that someone had invented an engine that ran on water was folklore.

So I confidently bet my biggest asset at the time—my future career—and interviewed for jobs at large oil companies. Nothing was larger than Exxon, so I celebrated when I received its job offer. The price of oil fell dramatically before I started the job, and it later collapsed. I think I was the last MBA hired by the oil giant for at least a couple of years.

Fast-forward to today: The price of oil hasn't even kept up with inflation. It wasn't that we made great strides in finding alternative sources of energy (the only thing I thought could make my prediction wrong); rather, it was new technologies that resulted in the discovery of new oil sources, more efficient oil production and improved engine efficiency.

The lesson: The future is a lot harder to predict than we think. Being 100 percent certain of anything is probably in itself a sign that we're making a significant mistake.

The wrong index fund

I first heard of stock index funds in the late '80s. These funds buy shares of stocks that make up popular stock market indexes, and don't require a manager to make investment decisions. I had seen enough data to know that actively managed funds didn't beat index funds. So I bought an S&P 500 index fund from one of the industry giants then, Dreyfus. Dreyfus later raised its management fee (now 10 times that of a low-cost S&P 500 fund, such as Vanguard's), leaving me with the miserable choice of either paying high fees or being taxed by the IRS on my profits if I sold.

I did sell some, but, over the past quarter century, I've also paid thousands of dollars in unnecessary fees.

The lesson: Fees matter, especially when compounded over the long term. Given similar investment strategies and performance records, go with the fund family that has the history of lower fees.

The pricey house

In 1998, I officially entered my midlife crisis, kicked the dust of the corporate world off my boots, and moved my family to Aspen, Colorado—one of the most expensive housing markets in the country. Though I knew how important diversification was, I chose to buy a house that became most of my net worth. I had spent nearly two decades working hard and living frugally, and essentially bet everything I had worked for on an unspectacular house in a spectacular location.

While I could afford the payments, I knew our financial future was largely tied to one asset. That, combined with high maintenance costs, kept me awake at night. I had been told you couldn't lose money on Aspen real estate, but my previous lessons had taught me that such truisms are often wrong. I was obsessed with the real estate market in Aspen, to the degree that I picked up a real estate broker's license.

A couple of years later, we sold the house at a profit and moved to Colorado Springs, where real estate cost only about a tenth of what it did in Aspen. Not too long after we sold the Aspen home, the housing market declined. Had I waited another year, I'd have seen my nest egg plunge. I violated the cardinal rule of diversification but got really lucky.

The lesson: Diversification helps you sleep at night, and if an investment makes you either restless or excited, it has "mistake" written all over it. Last, and perhaps just as important, never confuse luck with skill.

The bargain investment that wasn't

Real estate investment trusts, or REITs, are like mutual funds for real estate; each fund buys a portfolio of properties and sells shares to investors. Some REITs are publicly traded, so you can cash out at any time; others are sold privately by brokers. I had written about privately traded REITs that were sold under the guise of providing safe high income with little risk. Their performance was mostly abysmal. I warned people not to buy them.

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But in my research, I learned that one could buy these investments at deep discounts. This happened when initial investors wanted some money back, so they let the broker sell their shares at fire sale prices. I bought some at a price far below what they originally sold for. As it happened, they earned less than if I had invested in stock index funds. In broker lingo, they were real dogs. One cut dividends by more than half in a very tricky way.

The lesson: A bad investment is a bad investment at any price.

Buying stuff instead of experiences

Ever since I was a child, I remember thinking that if I bought an experience, it would soon be over, but if I bought tangible stuff, I'd be able to enjoy it for years. While I'm frugal to the core, I was especially so when it came to experiences. I lean toward bargain vacations, nosebleed seats at shows, and inexpensive restaurants.

A few years ago, I discovered research that showed I had it completely backward. Happiness comes from experiences and the memories of those experiences. When we buy stuff, it buys happiness for only short periods—and can sometimes bring misery later, such as the new car getting a ding in the parking lot. It was an eye-opening, life-changing realization.

The lesson: Making money is well and good, but happiness lies in getting out and enjoying life.

So what did these bad money moves have in common? They all involved overconfidence in my judgment. While I thought I was using impeccable logic, my thinking was actually colored by my emotions and ego. I didn't know what I didn't know.

When making a major decision, try to imagine what could go wrong. If you can't think of at least a couple of things, then you might be making a money mistake. Take time to let the logical side of your brain kick in. Finally, when you do make a money mistake—and you will—own it and learn from it. Otherwise, odds are high that you will repeat it.

Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.