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3 Dumb Things Smart People Do With Money

Even brilliant people can make careless mistakes

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En español | Over the years, I’ve seen some brilliant people make really stupid money decisions. That’s why I was excited to see Jill Schlesinger’s new book, The Dumb Things Smart People Do with Their Money. Schlesinger, a business analyst at CBS News, lists 13 dumb moves and ways to right these financial wrongs. Let’s look at three of them. 

1. Buy financial products you don’t understand.

I review annuities, hedge funds, private REITs, alternative investments and the like.  The more complex the investment, the worse it typically is. I point to the thick product disclosure document and say, “I promise you that the lawyers and the actuaries didn’t write this document to protect you.” These products are often easy to buy but very costly to get out of, if you even can.

Simple products are typically superior. I tell people not only do they need to understand what they are buying, but if they can’t explain it to any 8-year-old, they probably shouldn’t buy it. Stick to simple investing. In an interview, Schlesinger said the larger the disclosure document, the more important it is to thoroughly understand.

2. Take on too much risk.

Our willingness to take on risk is not stable. When markets are going gangbusters, we think we have a high risk tolerance. It’s only when they plunge that we realize we were wrong. The research of Daniel Kahneman, the first psychologist to win a Nobel Prize in economics for his work in behavioral economics, revealed that we get twice as much pain from losing money as pleasure from making that same amount.

Because the bull market is nearly 10 years old, and the 2008-2009 plunge a distant memory, we forget the lessons from the bear and tend to think we are very risk tolerant. Even advisers took on too much risk, only to turn to cash after the plunge.

Though we got a little reminder at the end of last year, the market didn’t officially hit the bear territory, which is commonly defined as being down 20 percent or more. 

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We all want more wealth, but we often forget the consequences if things don’t go right. Those consequences might be working many years longer or even having to go back to work after retiring.

In short: Pick an asset allocation you can live with. It’s much better to buy stocks when they’ve gone on sale rather than follow the all-too-human trait of selling after a plunge.

3. Make money more important than it is.

I’m guilty of this one. Money seems to have a magical importance in society that can eclipse other valuables. As Jonathan Clements writes in his HumbleDollar blog, “Money may feel like our scarcest resource, especially when we’re younger. But in truth, our most finite resource is time.”

Schlesinger writes that individuals feel happiest when they make somewhere between $65,000 and $75,000 a year. Consider using a different measure of financial wealth: Wealth in years = net worth in dollars/annual expenditures.

If, for example, you have a net worth of $200,000 and need $20,000 above Social Security, you have 10 years of financial wealth. If you examine what purchases in the past made you happy, you might be able to eliminate some expenditures. 

In the above example, if you cut your expenditures above Social Security down by $10,000, you’ve instantly doubled your financial wealth to 20 years. Schlesinger told me she has heard people tell her dozens of times that they were happier when they made less money.

And getting good deals on purchases can increase your wealth. Here are six things that can save you a bundle while taking little of your time.   

These are but three of the 13 dumb things Jill Schlesinger discusses in her book. She gives a vivid account of those she has worked with, disguising the names to protect the guilty. Readers may find they have made some of these same mistakes. Not to worry: For each of these 13 dumb decisions, Schlesinger offers great advice to right these financial wrongs.