4 Big Mistakes That Will Devastate Your Finances

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Coming up with the perfect investing strategy can take a lifetime of effort and discipline. Unfortunately, all that hard work can go down the drain with just a few lapses in judgment.

That's why it's essential to make sure you not only have an overall investing plan to follow but also include rules that help you stick with that plan through thick and thin. That way, it'll be easier for you to avoid making the common mistakes that can turn a successful, secure retirement into a financial nightmare.

Mistake 1: Putting off saving.
Young adults face more challenges than ever. With student loans imposing a larger burden on graduates' finances than ever before and good jobs hard to come by, just digging your way out of debt is a tough assignment -- let alone starting to save.

But by making an effort to put at least some money aside for long-term financial goals, you put time on your side. Consider: Every dollar you set aside at age 25 will give you twice the nest egg in retirement as a dollar saved at age 35, assuming a 7% annual return. Invest smarter, and it'll make an even bigger difference. So do whatever you can to get started early and not procrastinate.

Mistake 2: Blowing your best chances.
Savers are reluctant to put money into IRAs and 401(k) retirement accounts because they don't like locking their money up. But the tax savings from these accounts can make a huge difference -- especially for late starters.

Catch-up provisions for those age 50 or older let you save $5,500 more in a 401(k) and $1,000 more in an IRA, letting you set aside as much as $28,500 in tax-favored retirement accounts in the years immediately before your retirement. That's a great way to make the most of your top-earning years while not giving up all of your savings to Uncle Sam and the IRS.

Mistake 3: Dumping stocks on dips.
Once you have investment gains, kneejerk responses are hard to avoid. But they're often exactly the wrong move.

Back in 2008, I made a big mistake by selling shares of Starbucks (Nasdaq: SBUX  ) to harvest tax losses. I convinced myself that in a new era of austerity, the days of the $4 latte were numbered. Trends like Green Mountain's (Nasdaq: GMCR  ) single-serve coffee and McDonald's (NYSE: MCD  ) bargain-priced cafe drinks seemed like obvious winners in a more budget-conscious world, and I assumed their success would come at Starbucks' expense. Yet even though Green Mountain and McDonald's did indeed thrive, plenty of people kept spending their money at Starbucks -- and the stock rose sixfold as a result.

Every day, the stock market gives you chances to leap before you look. Occasionally, your emotional response will turn out to be right -- but often, you'll regret that gut-driven move in the long run.

Mistake 4: Riding your losers
Related to the last point, it's always tempting to try to hold on to a losing stock in the hopes that it will rebound. But if a stock keeps grinding lower day after day, month after month, it can crush your spirit and eventually leave you wanting to sell at any cost. In those cases, you're better off getting out early.

Chesapeake Energy (NYSE: CHK  ) provides a couple of useful points. Many have argued that natural gas prices can't drop forever -- yet even at decade lows, there's more room for further declines if the supply-and-demand imbalance continues. That has hurt Chesapeake, both operationally and through the ongoing financial problems of CEO Aubrey McClendon, whose interests in Chesapeake wells have now raised new concerns about conflicts of interest in the executive suite. At this point, even if natural gas bounces back, you might profit more from lower-cost producer Ultra Petroleum (NYSE: UPL  ) than with controversy-ridden Chesapeake.

Learn from your mistakes
No matter how hard you try, you won't always avoid mistakes. The key, though, is to recognize when you've made a mistake and to minimize its impact on your portfolio. If you can do that, you'll have come a long way toward creating the perfect investing strategy.

The Motley Fool's special report on long-term investing has some additional pointers on building the strategy that's right for you. It also reveals three promising stock names that could fit well in your portfolio. Getting access couldn't be easier: Just click here to get your free report today!

Fool contributor Dan Caplinger has made his share of mistakes. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Starbucks and Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of McDonald's, Ultra Petroleum, Green Mountain Coffee Roasters, Chesapeake Energy, and Starbucks, as well as writing covered calls on Starbucks and creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is never a mistake.

Read/Post Comments (17) | Recommend This Article (68)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 01, 2012, at 5:40 PM, scrobum wrote:

    Mistake #3 and Mistake #4 are somewhat contradictory. In the text for mistake #3 the author indicates that he should have rode his loser stock, Starbucks (loser in the sense that it literally lost him money, based on selling to harvest tax losses). But then in #4, he says Riding your Losers is a mistake. I wish I had rode my loser stock AAPL instead of selling it in the 90s. Also, I'm glad I rode my loser stock SCSS, since it's up more than 100x since 2009. After investing for over 20 years, I've come to believe that selling losers is a bad idea in general, especially if you mean to reinvest the proceeds, because you're basically making a bet that your new investment will outperform the loser by more than the spread and commission you pay to switch into the new stock.

  • Report this Comment On May 01, 2012, at 6:03 PM, TMFGalagan wrote:

    @scrobum - I totally understand what you mean. Here's the thing: you should figure out early on with a losing stock whether you're going to ride it all the way down or not, and then stick with that decision. I made two mistakes with SBUX: either I should've sold it long before it got that low, or I should've held onto it for the duration.


    dan (TMF Galagan)

  • Report this Comment On May 01, 2012, at 6:03 PM, ejclason2 wrote:

    For mistakes 3 and 4, the hard part is knowing the difference between stocks on a dip and losers.

  • Report this Comment On May 01, 2012, at 6:05 PM, maniladad wrote:

    Just to confirm what scrobum said, Dan, you didn't make a mistake in strategy with Starbucks, you made a mistake in analysis. Sometimes selling is the right thing to do and sometimes it isn't. In the analogy that good stocks are like buses, in that there will always be another one coming along, you can say that sometimes you might get off too soon and at other times you might find that one is not taking you where you want to go. It's a question of judgement and all you can do is to get as much data as you can and make the best decision you can. And then, good or bad, learn from it but don't waste time regretting it.

  • Report this Comment On May 01, 2012, at 7:09 PM, Terrang wrote:

    Yes, it's obvious three and four contradict. And the responses show that mistakes will be made so get over it and get on with it.

    But once a stock starts "grinding down" day after day after day...whether to hold or bail is going to be a tough know which stocks are core and which are speculative in your own investing plan.

  • Report this Comment On May 01, 2012, at 9:40 PM, AZDoc23 wrote:

    Speaking of energy stocks, I bought shares in a small company called Kodiak Oil and Gas (KOG) in March. To date it has provided a 33% return. It has been consistent and shows no signs of slowing down. As of the close on May 1st, it is selling at $8.82/share. I see it as one of those small stocks that will do very well as oil continues to rise. I call stocks like these "diamonds in the rough".

  • Report this Comment On May 02, 2012, at 1:43 AM, bobs111 wrote:

    You forgot mistake #5

    I never Know when to sell!

  • Report this Comment On May 02, 2012, at 9:19 AM, XMFGortok wrote:

    For Mistake #1, it's sort of a catch 22. If I save money now (even though I'm still in debt), I only *make* money if my rate of return is higher than the interest rate on my debt. So if it's credit card debt at 9%, I'd have to have an investment return better than 9% to 'grow' my savings, otherwise whenever I pay that credit card off, I'll have gone practically nowhere (or worse, gone backwards).

    With Student Loan debt, it's easier to save since (right now) the interest rates on that debt are really low (my subsidized* loan is at 2.11%, my unsubsidized loan is at 6.55%); so as long as I have a better rate of return than 6.55%, I'll actually be saving money.

    But; and this is not really addressed in the article: Is it better to have all debt paid off before saving for retirement?

  • Report this Comment On May 02, 2012, at 9:42 AM, Dwightfish wrote:

    Gortok, I see your dilemma but you may want to take a two pronged approach to a solution. It is important to save early and small amounts invested early should provide decent returns over time. Allowing your loan to languish is not a good strategy either. You should strive to pay down the loan while saving anything you can.

  • Report this Comment On May 02, 2012, at 10:02 AM, J4bber wrote:

    The key to #3 and #4 is to define what is constitutes a dip vs a looser. And I also think this is something that every investor has to figure out on their own, with their own investing style and comfort.

    I personally take a risk vs reward mentality. What is the risk that this stock will keep going down (reason to sell) and what is the risk it will pop right back up and turn into a gain (reason to hold). If you determine the risk of one is greater than the other, then do that one.

    Since everyone defines risk differently, that, my friends, is where your personally experience and, honestly, mistakes must be weighed in.

    If you have no idea where to start, then here is some of what I look at. Look at Fool's own Risk Rating. This seems to be measuring using a number of factors the likelihood that a stock will fall. And is in theory not too bad a place to start. Now lets say a stock falls 10%. Does the Risk Rating change? Take a look at the questions that are used to generate the risk rating. Did any of that information change? If so the risk went up. How much are you willing to give and still sleep at night.

    In reverse, if all the questions are still answered the same way, then in theory the risk went down ( or the risk to miss an up move went UP) because the stock is not cheaper so you are risking less money for a gain...

    I know my thoughts may be flawed and I am still learning as well, but thought I would share my thoughts..

  • Report this Comment On May 02, 2012, at 3:11 PM, ardo6088 wrote:

    hold your stock by apple i lost after one week 10 percent i had 200 shares think about dat , de beers and bulls make de game not de little man

  • Report this Comment On May 04, 2012, at 5:03 PM, mikepriz wrote:

    When I was in college in the late 60's, I took an investing class. We were given an imaginary amount of money to invest. I put it all in Lockheed. Roles Royce, the manufacturer of jet engines for Lockheed planes had just filed bankruptcy. Lockheed stock had fallen 50%. Once the panic was over, Lockheed stock regained almost everything. The lesson that I learned (while getting an "A") is that the market moves irrationally too far on emotion rather than fact. I just bought 1000 shares of Chesapeake at $16.90. I doubt if Ultra Petroleum will be able to match the short term gain I will experience with Chesapeake.

  • Report this Comment On May 04, 2012, at 5:06 PM, WineHouse wrote:

    I think what scrobum, etc. are all saying is that they -- and I, alas, also -- don't have crystal balls.

    The plain and simple fact is that "investing" based exclusively on market price movements is not investing at all, it's gambling. To be an "investor", you need a sound reason (or set of reasons) to buy shares of a company in the first place, and you need a sound reason (or set of) to divest those shares.

    If you're just basing your purchase of shares on market price movements, you're a gambler, not an investor. Period.

  • Report this Comment On May 05, 2012, at 11:53 AM, TMFDarwood11 wrote:

    I think the number one mistake that will "devastate finances" is a failure to learn simple finances. That includes budgeting, saving and avoiding debt.

    Once that one has accomplished that, it then becomes possible to do something with the money that wasn't flushed servicing debt.

    Of course, if one begins investing early in life, before becoming up to their eyeballs in debt, then the issues of this article immediately become important. However, recent conversations about the $1 trillion in college loans indicates that people make these potentially ruinous decisions very early in life.

    In an unrelated manner, company 401(k)s have done a great service to younger, working people. My children all work at companies that provide them and it's amazing how the children have come around about stocks and investing. After a few years of working they open their 401(k) statements and now say "wow." Even the one who didn't want to meet the company contribution now does so. The company did what I could not!

  • Report this Comment On May 07, 2012, at 10:23 AM, petermac51 wrote:

    My stategy is a simple combination of all your points.

    Buy good stocks at a midpoint of annual highs and lows, and hold on to it until it makes money, an amount you predetermine...10%, 50% double etc..Whether that takes days, weeks, years, or a generation. With good stocks,selling stock at a loss doesn't have to happen..Right now, among others, I have aapl at 375 cost basis, and am holding out for a double, should be mid to late 2013.

  • Report this Comment On May 07, 2012, at 3:04 PM, Reyniel wrote:

    Why do I feel like this article and these comments are just on here to sell me CHK stocks?

  • Report this Comment On May 16, 2012, at 3:29 PM, thidmark wrote:

    "I just bought 1000 shares of Chesapeake at $16.90. I doubt if Ultra Petroleum will be able to match the short term gain I will experience with Chesapeake."

    Not looking good so far.

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