Image source: Ross Huggett, Flickr.
It's hard to get through life without making a lot of mistakes, many of them financial. It's smart, though, to learn as much as possible from other people's mistakes, as that can help you avoid committing many common blunders. Here are three Fool contributors fessing up to some regrettable moves they've made.
Tyler Crowe: I like to think that I'm still young enough that I haven't yet made an investing mistake that I can't recover from. I've made my fair share of dumb stock picks, but one thing I have really kicked myself for is not taking advantage of individual retirement accounts soon enough.
I'm a pretty boring investor. I love dividend stocks and watching those payments buy more and more shares on a regular basis. As long as I keep getting those cash payments coming in and they continue to grow at a modest clip, I'm much less concerned about the daily ups and downs of the underlying stock prices. While this buy-and-hold-a-cash-stream approach can be effective, it can make even more of an impact when done using IRAs.
Every dividend payment that you receive in a regular, taxable account is considered a capital gain, so you have to pay taxes on those gains regardless of whether they are paid out in cash or are used to repurchase shares. This may not be a huge payment in the first couple of years, but if you hold a position for 10, 15, or 20 years, those capital gains taxes can add up. In a traditional IRA, though, those gains will only be taxed when withdrawn -- and in a Roth IRA, contributions are made on a post-tax basis, and withdrawals made following the rules are completely tax-free. Traditional IRAs offer the added benefit of lowering your taxable income in a given year by the amount of your contributions.
If I had been smarter earlier, I would have better utilized these kinds of retirement accounts over the past few years. Still, I'm glad I'm doing so now, and I have enough time to make up for it in the future.
Making mistakes is inevitable. But if you're smart you'll learn from them and not repeat them. Photo: hobvias sudoneighm, Flickr
Todd Campbell: When you're young, you can afford to take on more risk, but just because you can take on more risk doesn't mean that you should. I learned that lesson the hard way.
During the Internet boom, I built a very nice nest egg for myself by buying out-of-the-money options on hot stocks and selling those options for big gains when they jumped higher. That strategy worked great -- until it didn't.
Unfortunately, rather than shifting my gains into something safer, I kept rolling the dice and betting bigger and bigger until the Internet bubble popped and my option portfolio got wiped out.
It was a very painful experience and it taught me a critical lesson: Never underestimate your risk, especially when everything is going in your favor!
Selena Maranjian: One money mistake I wish I'd never made over the many years that I've been investing is investing inefficiently. I didn't get my wake-up call about the importance of saving money for retirement until I was in my 30s. So in my 20s, although I wasn't wasting the modest income I earned at the time, I wasn't making the most of it, either. I recall thousands of dollars slowly accumulating in my bank account, while I pondered whether I should perhaps spend it on a fancy stereo.
If I'd instead known enough to park $5,000 in the stock market, it could have grown for about 30 years. Over long periods, the S&P 500 has risen by an annual average of close to 10%. If my $5,000 had achieved that kind of growth rate over 30 years, I'd have an extra $87,000 in my nest egg today! (And, of course, had I added to it in those early years, I'd have far more.)
The mistake of investing inefficiently didn't end once I entered the stock market, though. In my early years, I made lots of poor choices (and still do, on occasion). I chased high-flying stocks, many of which were overvalued at the time and later fell back to earth. I was impatient with stocks that didn't perform as I expected in short order, so I would sell them and jump into something new. I ignored the power of dividends, fell for stocks with strong stories and weak financials, and owned more stocks than I could reasonably keep up with.
We all make regrettable financial moves. The key is to keep reading and learning, so that we might make far fewer of them as soon as possible.
