Apple Computer was founded by Steve Jobs and Steve Wozniak on April 1, 1976. What is less well known is that he originally had a third co-founder, an engineer named Ronald Wayne. However, Wayne's tenure with the company was short-lived. Concerned about the risk and Jobs' personality, Wayne sold his stake in the company just 12 days later.
Wayne received $2,300 in exchange for a 10% stake. Today, Apple AAPL,
It's worth nearly $3 trillion. Mr. Wayne's decision to sell is sometimes cited as one of the worst failures in financial history.
But it's hard to judge him. “No one could have predicted that Apple would become this big,” Wayne said. In fact, this is the reality of many financial decisions. Looking at Apple today, Wayne's mistake seems monumental, but there was no way of knowing what would happen. It's only when I look back on it now, nearly 50 years later, that I can say it was a mistake.
However, many financial decisions do not require hindsight. Here are 11 common financial mistakes that are mostly avoidable.
1. Overallocation to illiquid assets. In 2008, Harvard University's endowment was in trouble. It was worth $37 billion on paper, but was facing a funding shortfall. It was overcommitted to private investment funds and real estate, failing to provide liquidity precisely when universities needed it most. As a result, the Foundation decided to sell some of its assets at fire sale prices.
Although this is an extreme example, the same dynamics can affect retail investors. Like Harvard, it's easy to ignore the risk of illiquidity when markets are rising. Therefore, if you hold private investments, it's important to have a plan in place to weather a potential economic downturn.
2. Over-allocate to a single asset. The current market is dominated by the so-called Magnificent Seven tech stocks. If you own one of these, that's great. But it can also pose risks. Because it may be too large a percentage of your portfolio.
A simple solution is to diversify by selling the stock or part of it. However, some may be concerned about the tax implications. It's understandable that you don't want to walk away from an investment that's been very successful. This is called recency bias. Good solution: Don't view sales as an either-or decision. Instead, try chipping away at large positions over time.
3. Choose interesting investments. As we recently pointed out, there are thousands of investment options out there. If you have a sizable portfolio, it can be difficult to stick to a simple set of investments. It's natural to want to explore more interesting terrain. But data shows that “interesting” investments tend to be less profitable than boring ones.
4. Not carrying an umbrella cover. For many people, insurance is a tedious subject, so we tend to put this part of our financial lives on autopilot. However, it's worth reviewing your coverage every year. In particular, make sure you have umbrella insurance in addition to home and car insurance. Umbrella insurance tends to be cheaper because it's designed to protect against the unexpected.
5. We pay too little tax. It may sound counterintuitive, but it's important to be intentional about taxes in retirement. During the first few years of retirement, you can get so excited about lower taxes that you miss out on important opportunities. Thanks to Social Security benefits and required minimum distributions from retirement accounts, his taxable income tends to increase again after age 70, sometimes rapidly. It can be a mistake not to withdraw funds from a tax-deferred account during the early, low-tax years.
6. Use cash for charitable giving. Do you have stocks or other investments with unrealized gains in your taxable account? If so, don't overlook the value of donor-advised funds (DAFs) for charitable giving. When you move appreciated stocks into a DAF, you can sell them tax-free, with all proceeds available for charitable giving. That's why it's almost always better to donate this way instead of cash.
7. Act on market predictions. Do you follow market news and commentary? Absolutely. But do we use it to inform investment decisions? Rarely. How do we explain this seeming contradiction? In reality, most market events are short-term in nature, but most people's financial plans are centered around the long-term. It is built on. That's why I don't want to believe too much the advice of market commentators.
8. Act on anecdotes. Why do we enjoy watching movies and reading books? Because stories are persuasive. But when it comes to investing, this can be a risk. It's very easy to tell a compelling story about most companies. The problem, however, is that stock prices are driven by a combination of news, data, and investor opinion, and it's difficult to know how these factors combine to influence stock prices. That's why it's a mistake to place too much emphasis on specific anecdotes.
9. Act according to current events. The value of a company's stock should be more or less equal to the sum of its expected future profits this year, next year, and every year in the future, so recent events shouldn't be given too much weight. Suppose a car company is fighting an expensive recall. Yes, it's important, but probably only for short-term benefits. If a company continues to be in business 20, 30, or 50 years from now, one year's decline in profits will have a small effect on the overall value of the stock.
10. Act in response to political events. This is an election year, and investors are always wondering and worrying about the impact of political events on the market. But the fact is that the market has risen under both parties. In fact, the best market results occurred when the White House and Congress were controlled by different parties. Bottom line: Investors shouldn't let their excitement over election results influence their financial decisions.
11. As a parent, college tuition is too expensive. A good college education provides a positive return on investment. However, it is important for parents to realize that it is the child, not the parent, who benefits from this. Everyone wants to help children, but it's also important to look at the numbers. If the parents are no longer able to afford it, it is okay for the child to take on some debt.
Ronald Wayne is philosophical about his experience at Apple. “Should I just keep feeling sick?” he asks. “I didn't want to waste tomorrow mourning yesterday. Does this mean I'm emotionless and don't feel pain? Of course not. But I handle it by working on the next thing. . That’s all we can do.”
Certainly, no one can make every decision correctly. But that's why it's even more important to avoid failure as much as possible.
This column first appeared on Humble Dollar.Reprinted with permission.
Adam M. Grossman mayport, a fixed fee asset management company.follow him @AdamMGrosman.
