Financial Mistakes happen. As much as we try to avoid them, they will occur. Hopefully not twice, but that happens too. It’s something everyone has to deal with no matter how rich or how poor they are.
Not the End of the World Unless You Allow Them To Be
Financial mistakes are not the end of the world unless you allow them to be. Part of having an abundance mindset is knowing there is enough to go around and that you will find a way to recover. However, when there’s a scarcity mindset, it can seem like the end of the world and that things will never go back to the way they were.
I’ve had several friends have up and down financial lives. They always find a way to recover though because they believe they can. It might take them longer than they wanted to or expected to, but they have recovered.
I have also committed several financial mistakes, although I didn’t know they were mistakes at the time. I found a way to recover as well and without those mistakes I wouldn’t have had the knowledge and wisdom to write my book Cash Uncomplicated.
Learning Opportunities
The way that I look at financial mistakes is that they are learning opportunities. Really big learning opportunities, especially for the more costly mistakes.
Mistakes are stepping stones. They are feedback that your idea or plan didn’t work. Then you take that knowledge and make a bigger and better plan.
For example, if you made the mistake of investing in a bad real estate deal, you are going to vet the next property a lot more the following opportunity. You’ll have clearer criteria and will likely find a much better property had you not made that mistake the first time.
Five Financial Mistakes You Can Recover From
My opinion is that you can recover from almost any financial mistake. For now though, let’s just start with these five.
Number 1: Investing Too Aggressively
Investing too aggressively can turn out well or be a mistake. I think for most people it’s a mistake because they aren’t taking calculated bets. I’m all for aggressive investing if it’s done by taking a calculated risk.
For example, investing in the S&P 500 is aggressive–certainly more aggressive than holding a portfolio of bonds. With time, this investment is likely to pay off much greater than a less risky strategy.
Here’s where it gets really aggressive. Imagine a scenario in which someone believes they can predict the big stock winners. They think they’re going to find the next Amazon, Apple, Nvidia, or Tesla. Placing a high percentage into a single stock that looks like a big winner is too aggressive in my opinion.
Sure, the stock could hit and that person becomes very rich but more than likely the S&P 500 is going to beat most individual stock pickers. I think it’s reasonable to be hyper-aggressive with some investments, but not your entire portfolio.
Related: Is It Ever OK to Speculate?
Number 2: Getting Scammed
Scams used to be when someone would call or email you and tell you that you’re in line to inherit millions of dollars as an heir to the king in a far away country. Obvious scam, right?
Scams are becoming increasingly more sophisticated though. Technology allows scammers to generate emails and messages that look exactly like the real companies. The content is good too and the time sensitivity prompts people to act quickly.
Going beyond scams from strangers, there are also people you think you know that could scam you. Even more scary, these are people you often like and trust. Some of these sophisticated scams go on for years and years, allowing the scammer to establish rapport with you over a long period of time.
The chances of getting scammed, even for sophisticated people, is higher than it’s ever been. If you do get scammed, you will be able to recover. It’s not desirable or something anyone wants, but they can be recovered from.
With that said, it’s incredibly important to be hyper-vigilant and trust your instincts when things don’t seem quite right, because they probably aren’t.
Number 3: Not Investing
Investing too aggressively is a mistake but not investing at all is an even bigger mistake. Inflation is always a threat to your money and if you’re not investing, you’re not keeping up with inflation. And you’re certainly not beating it.
Think about how much an ice cream cone cost 20 years ago compared to today and you’ll understand just how impactful inflation is.
The best way to keep up with, and beat inflation, is by investing. I’m not here to tell you what to invest in or who to work with, but I will always tell you to invest in something.
Whether it be index funds, real estate, individual stock, mutual funds, crypto, or something else, you’ve got to be investing in something. Ideally a time-tested portfolio of investments that has withstood major world events.
Number 4: Overconfidence
Depending on when you started investing, you may have had really good luck to start your investing career. This builds up confidence, but can also lead to overconfidence. The problem with overconfidence is that we tend to get too cute with our investments and do things beyond our skill levels.
Here’s an example. Someone beginning to invest in real estate in 2010 literally could have bought any property in one of the coastal states and watched it appreciate by crazy amounts of money. There was some skill in making the decision to buy, but the reality is that most of the appreciation was a result of market conditions.
Many people saw the results with these properties and attributed it to their skill. Like they picked exactly the right property or correct neighborhood. Then that confidence turned into thinking they can replicate the process, starting to borrow money from others in bigger deals, and over-leveraging.
This worked for people with the skill and knowledge to pull it off, but didn’t work for those who were simply overconfident. Fortunately, this easily can be overcome by taking a step back and re-assessing skills. Then acquiring more skills to do what you want to do.
Number 5: Wrong Allocation
It’s easy for beginning investors to just put a bunch of money somewhere and hope for the best. This strategy works out if you’re lucky, but wrong allocations can really hurt someone.
For example, if an investor put a bunch of their money into certain individual stocks in the late 1900’s, they would have done really well for a few years. Then they would have lost most of their money in the dot com crash.
Same for someone with a hyper-conservative approach. If someone put most of their money into CD’s and bonds from 2015 to the present day, they would have lost out on the exponential growth of the stock market.
This is also easily correctable and it just requires reallocating assets into a more appropriate portfolio.
Conclusion
Financial mistakes happen, which is good and bad news. The bad news is that they happen–and happen to everyone. The good news is that they can be overcome. The even better news is that those who learn from them will be much better.
What financial mistakes have you made and how did you overcome them?
