If you’re smart, you learn from your mistakes. And if you’re really smart, you learn from other people’s mistakes.
With that in mind, take a look at the reasons some people make money blunders, according financial advisors and experts. It may make you feel better about your own situation, and, if nothing else, maybe you’ll recognize some of these behaviors in your own life.
You make a lot of assumptions. We’re all susceptible to this. So many of us tend to assume the best when we don’t want the worst to happen. Poor assumptions, however, are a big reason people lose money in the stock and housing markets, according to Marina Krakovsky, author of the new book, “The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit.”
A lot of the people who take risks are “blithely assuming that what’s going up is going to continue going up,” Krakovsky says. “Put another way, if you don’t even see that you’re in the midst of a bubble, then putting your money in there seems like a smart investment, not a gamble at all.”
You rush decisions. This is another prime reason people make money mistakes.
David Rossett, a wealth management advisor with Northwestern Mutual in New York City, has a client who bought an expensive home. For starters, “the house was financially a stretch,” Rossett says. If that wasn’t bad enough, before the client acclimated to his new budget, he decided to renovate almost immediately.
“What started as a small project quickly grew. Now they are very stressed,” Rossett says of the client and his spouse. “Fortunately, this client owns his own business. The hope is that he increases his income in the coming months to cover the added expenses. If that doesn’t happen, he will need to borrow from his in-laws. Which, obviously, he doesn’t want to do.”
Your perspective may be skewed. That is, you’re not looking at the big picture because, well, you’re excited about what you’re about to do, or maybe you don’t have all the information you need to make a smart decision.
That’s a problem ReKeithen Miller sees a lot. Miller is an Atlanta-based certified financial planner and portfolio manager with Palisades Hudson Financial Group, and he says he thinks some people have an unrealistic perspective of their chances for success when they’re about to take a risk.
“They are the people who see advertisements about someone turning a few hundred dollars into millions by following a secret trading formula or playing daily fantasy sports, but fail to read the fine print that says that the results are not typical,” Miller says, adding: “People are quick to share their successes when risks pay off but rarely share when things go terribly wrong, which can give people a false impression of the results of risk-taking.” He adds that people can also get a skewed perspective by spending too much time on social media sites like Facebook.
He says they give you “the false impression that all of your friends are always taking exotic vacations. You only see the highlights of their lives, not the extra hours they had to work to save up for that vacation or that they are actually in debt up to their eyeballs.”
You’re putting too much faith in the experts. It’s easy to imagine plenty of people shooting themselves in the collective feet because they won’t listen to the experts, but it can go the other way when you listen to them too much.
Bill Demaree, of Demaree Retirement Services in Indianapolis, says he sometimes sees people who are too willing to let financial advisors take complete control of their money, only to later regret it.
He has also seen that faith lead to bad decisions. “I had a client a few years back who got in over his head with a mortgage,” Demaree says. “Instead of staying in the $300,000 arena, which fit nicely into his budget, the lender told him he qualified for $700,000.”
The client decided that if the lender would let him have a $700,000 house, that’s what he should get.
It didn’t end well for the client, says Demaree, explaining: “He ended up selling the $700,000 house at a loss along with most of his down payment.”
You’re a victim of our culture. It would be nice to know that maybe your money mistakes aren’t your fault. While we ultimately should take ownership of our mistakes, there may be some truth to that.
If you ever lost a lot of money in a poker game or invested in a shifty business that later went south, maybe you were influenced by society. Miller says a big reason people take financial risks is due to how risk-taking is portrayed in American culture.
“America is a country that celebrates and often actively encourages risk-taking. Let’s be honest: Slowly accumulating wealth by sticking to a budget and investing in a diversified portfolio doesn’t have the sex appeal of risking it all in Vegas and coming out on top,” he says.
Your heart, not your head, is making your decisions. This may be the most common reason people make money mistakes, Rossett says.
“Why do people make bad decisions? … Sometimes it’s being cheap, sometimes it’s greed, sometimes it’s denial about their own mortality and sometimes it’s just being stupid,” Rossett says, adding that “typically, people make decisions emotionally instead of logically.”
The best defense against making a major money mistake, he says, is educating yourself.
And if you have made some major financial blunders, Krakovsky is empathetic. “Misunderstanding risk is part of human nature,” she says. “People shouldn’t feel bad about being ‘stupid’ with risk.”
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Why Do Some People Take Stupid Risks With Money? originally appeared on usnews.com
