Knowing the mistakes you are making that cost you money is useless unless you take action to avoid making the same slip-ups again.
This list, out of necessity, has to be a bit arbitrary. We don’t really have a valid way to measure frequency of occurrence or weigh the obvious errors we make for their bottom line financial impact. But to get us thinking, I am referencing a March 2013 article from Worth magazine, based upon multiple experts’ experiences, with my usual additions, deletions and curlicues.
1. Overreacting to the news
Paying too much attention to the “noise,” as some market watchers call it, leads to the herd mentality of buying high and selling low. The stunning result of this all-too-common phenomenon is that over the last 30 years, stock-fund investors posted an average annual return of 3.69%, according to Dalbar, a Boston financial company. However, average annual gain for the S&P 500 index was 11%. That’s why financial advisors earn their keep just by being an objective filter to save us from ourselves.
2. Abandoning your asset allocation strategy
We too often let our emotions pull us away from the well-established, research-based fact that 90% of returns really come from asset allocation, not from individual stock picking or market timing. So rebalance once or twice a year and stay disciplined in your diversity to steer the highest probability course between maximizing gains and minimizing losses. Reread the note about advisors saving us from ourselves.
3. Maintaining too many accounts
In this new era of doctors having employers and then changing employers, often previous 401(k)s and IRAs are left to sit without review, either because of confusion or just plain sloth. Get professional advice, aggregate where you can, and you will find it easier to monitor and to understand what is happening and where you are going. Extensive bookkeeping has never been my strong suit nor, I assume, the average doctor’s.
4. Keeping spouses out of the loop
This can get very expensive. Especially in the event of a divorce or in a premature death. Even if one person assumes the management of financial affairs in a well-intentioned effort to “spare” the other spouse, or if one spouse has the interest or talent to take on the lion’s share of the responsibility, it is essential to have regular marital discussions, with and without your advisor, on your financial status, the details of what/where/how, and your long-term plans.
5. Not including knowledgeable insurance, tax and legal advice
Too many docs assume these areas are covered properly in their planning, even the ones who are not in full denial mode. This never works out well. If you don’t believe me, ask around. This additional advice should be included in an annual review.
6. Not saving enough for retirement
I know, in this age of high student debt, growing families, out-of-control college costs and—the elephant in the room—Keeping Up With the Joneses, saving adequately sometimes seems like a wistful dream. So if this describes your situation, start paying yourself first with an automatic savings plan through your employer or your practice’s bank. Your older self will thank the younger you over and over.
7. Blindly chasing returns
This includes switching accounts or investments to whatever mutual fund ad said it had the best return over a recent period. The Morningstar research team just concluded “Low cost is the best single predictor of subsequent performance … it’s definitely not past performance.”
8. Overpaying for fees
The 1% to 2% in fees that is blithely dismissed can add up to 6 figures over your career. How would you like to be presented with an additional check for $100,000 at retirement? Note that many index funds cost less than 1% per year.
9. Doing it all yourself
We can’t even keep up with advances in our medical specialties, so what makes you think you can keep up with tax law, insurance products, estate planning, and financial options? Plus, just as a doctor who treats himself, you will have a fool for a client.
10. Not paying attention to numbers 1 through 9
I’m serious. Reading about this is useless without action. Remember, knowledge is power only if it is actually put to good use.