I got the idea to write this post from a Morningstar blog I read last year about the smart and not so smart things a couple of their columnists have done with their personal investment portfolios. I really liked the concept because it showed them, even as people in the finance industry, as normal humans. Like all humans, finance professionals have things that shape our decision making whether it be personal biases, past experiences or unfounded fears and concerns. I wanted to expand the scope of this beyond just investments though as our financial lives are so much more than that.
The reality is no one has a 100% track record when it comes to their personal finances, not even people who work in the industry. As an advisor, when I am talking to someone for the first time and they are sharing with me some of their details, I fully assume they have made missteps along the way. It is okay that you didn't start investing with the first paycheck you received, it is okay you didn't pick every correct fund in your 401k, and it is okay that you have made the occasional irrational purchase. The goal is to take where you are today and make better decisions that will improve your ability to meet your financial goals.
So with that being said, here are some moves I’ve made that I wish could get a do-over on.
1. Got a credit card in college
I was pretty good with money in my youth. I started earning money in my early teens by babysitting for neighbors and then getting my first summer job after my sophomore year of high school. I was good with saving up my money towards a goal whether that was a new bike, tennis racket or something else that I wanted. Fast forward to college and my expenses started to outstrip the money I would save from my summer jobs. Eating out on the weekends, ordering pizzas at 10 pm, and loading up on snacks at the on campus convenience store for study sessions with my fraternity brothers took a toll.
I was intrigued at the time with all the pamphlets displayed across campus for credit cards. What better way to address a cash flow problem than getting access to a credit card so I could spend more money I didn’t have? At the time, the Discover card had recently come out and offered a unique cash back offer. I mean, c'mon, spend a $100 and get $1 back? Perfect for a broke college kid. While I didn’t lose all of my earlier discipline, I did find it easier to break out the credit card and buy clothes, a new stereo component (and, yes, I am well aware of how I am dating myself with these references), and as a college student is want to do, pay for trips to the local bars.
While I never had a balance that got very high, maybe a couple of thousand dollars, it started a series of events that took almost ten years to undo. I’ll get to more of that with the next item.
2. Missing payments
Chalk this up to nothing more than being young, dumb and lazy. Between the credit card debt and a small student loan, I had a few payments I needed to make each month and I simply just didn’t make some of them. This led to penalties, service fees and higher debt balances. Again, this never got out of hand but based on the meager salary I was making after graduation it was enough to be stressful, at least for me. Missing payments made it harder to pay off the debt and hurt my credit score in the process.
If I had been smart and scheduled automatic payments like I do now, or just had the discipline to sit down once every two weeks even to mail in my payments (another dated reference) I would have saved quite a bit money and been out from under the debt much sooner.
The downside with having the debt is the things you don’t get to do because that money is going towards interest and paying things you have done in the past. I would have been better off being able to increase my 401k contributions or building up a decent emergency savings cushion. This can create a vicious cycle. Because you have debt payments to make, you don’t put money in savings and then when you need new brakes on your car you don’t have the cash to pay for it, so you end up having to put the expense on the credit card leading to even more debt.
3. Getting a Variable Universal Life policy to help save for college
When our daughter was young, we started saving almost immediately in a 529 plan to address future college costs. This was going fine, but at some point, we were concerned about possibly having too much in the 529 account. We were working with an advisor at the time (this was prior to my own career change to be an advisor) who suggested using a VUL as a backup college savings method. The selling point of the policy was it gave us life insurance on our daughter and, we had flexibility with the invested portion of the policy to borrow against it if we needed the funds for college. If we didn’t need the funds for college then we could decide to use it for whatever we wanted to later, including letting her use the funds to get started after college. And the charts they show you about how these funds will grow are very enticing (and likely misleading).
Sounds like a good plan, right? These policies may work for someone under the right circumstance, but this was not the right scenario or policy for us. These policies contain life insurance, an investment component and cover the fees/commission for the insurance company. We had a monthly premium of $150, and since insuring an 8 year old is very inexpensive, we assumed that left the rest to be invested. As it turns out, $50 of the $150 monthly premium was going to cover administrative expenses (read the advisor’s commission and fees to the insurance company) so we weren’t investing nearly as much as we thought. 7 years into the policy, we only had as much as we had put in.
To make matters worse, these policies have a surrender penalty meaning that if you want out of the policy within the first ten years you will pay a substantial penalty. So once we finally determined this was not the best way for us to go, we realized that we still had three more years to avoid the penalty. We ended up waiting one more year and paying a slightly smaller penalty so that we could take the funds and reinvest in a different account while getting out from under the monthly premium where 1/3 was lining someone else’s pocket.
Wanting to have a secondary method for saving was not necessarily a bad idea, we just chose the wrong way to do it. We would have been much further ahead if we had taken that money each month and put it in a brokerage account. A Roth would have been an even better option but we were above the income limits for contributing to that type of account.
4. Jumping on investment bandwagons
One of the primary rules I try to live by with investing is that it is very hard to time the market. Having a well diversified portfolio that is rebalanced periodically is a sound long term investment strategy. That said, there are always some shiny objects out there that can make it feel like a way to get further ahead with your investments. Over the past ten years, there have been a number of these types of opportunities where it feels like the next big thing is there for the taking. A list of these include:
· Meme stocks
· Covid stay at home stocks
· Cryptocurrency
· ESG
· Cannabis
· Web3.0
· Metaverse
· EV
Take a look at a few of these charts that represent some of these industries. I understand we can poke holes in the faults with these individual companies or industries but at some point there was a lot of hype around these names.
Roblox - metaverse
ACB - Cannabis
TAN – Solar ETF
Lucid – EV manufacturer
For the most part, these represent new industries or technologies that were thought to be the next big thing (ESG, Cannabis, Web 3.0, Metaverse, EV – with the exception of Tesla). What is common here is that in the beginning there is a lot of buzz and anything related to this great new thing starts going up. What investor doesn’t want to get in early and reap the benefits of a new booming industry? I admit, I have gotten caught up in the buzz and made investments in several of these areas, and let's just say that I did not always get in or out at the right time.
As you can see, some of these even did very well for a period of time and some people likely made a ton of money assuming they got out in time. But it is very hard for people to know when you hit that tipping point, and those who missed that tipping point or got in late may have lost a lot. In some of these cases, the demand wasn’t as great as people thought or the costs were just too high to avoid losing mountains of money or have a large enough customer base.
Swinging for the fences with a part of your portfolio isn’t always a terrible idea. But you need to have your eyes open wide and understand these can be very risky. As a result, these types of investments should be limited to an amount or percentage that won’t put obtaining your other goals at risk.
5. Make financial decisions based on future assumptions
This past year we decided to move into a new house. It was a big move for us and we knew there was going to be a big financial impact with a larger mortgage. We were in a really good place financially with our old house having a 2.25% mortgage with just over 10 years left. The new house is a new build so there was about seven months from the time we entered into the purchase agreement to when we actually moved in.
To make sure we were on the same page with how this would impact us we sat down and went through everything before we signed the purchase agreement. We discussed the impact on our cash flow and what this meant to our retirement. It was a great conversation and we felt really good about the decision as we were fully on the same page and were aware of any adjustments we were going to have to do to make this all work.
To be clear, the decision to buy the house was not a bad one, and I don’t regret it. We have our “forever” house and there have been a lot of benefits we have realized being in the new place. The mistake we made was back in the initial planning discussion where we made several assumptions about our future finances when crunching the numbers. In hindsight, we were overly optimistic about projected raises, the market value of our house, the costs involved in the move and where interest rates would be.
We couldn’t have timed the interest rates worse. Rates started to skyrocket as soon as we entered into the purchase agreement and by the time we finally locked in, rates had gone up 2.5% which had a major impact on our projected mortgage payment. As a result of the rising interest rates, buyers were getting scared off, the once hot housing market started to cool and we didn’t get quite as much as we wanted for our old house.
In addition to our projected expenses being higher, we didn’t quite realize the full amount of increased income we expected either. As a result, we had the double whammy of higher costs and not the income we expected. Because of the initial planning discussion we had we have been able to continue making the adjustments we have needed and our ability to work together on this has been a great byproduct of the situation.
None of our assumptions that ended up going the wrong way were a result of our actions or directly our fault. Market conditions change over time, sometimes for the better and sometimes for the worse and sometimes you don’t get the breaks you were hoping for. This just highlights the potential risks of making a big decision like this while using information other than what you know today. Making the decision based on rosy future projections increases the risk that you could end up in a worse spot than you anticipated if they don’t pan out. Just make sure you have your contingency plan ready to go if that is the case.
Well, there you have it. I hope you enjoyed my sharing some of the skeletons in my financial closet. Remember, we all have them. Don't beat yourself up to bad for past missteps. All you can do now is focus on making sound decisions moving forward. For the next post, I will share some of the things I have done that have worked out a little better for me.
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