If you’re like many, the thought of investing gives you the heebie-jeebies. After all, there is a lot to be nervous about: Investing feels complicated; there are confusing acronyms and terms to get your head around, and it certainly does involve risk.
Despite that, your wise inner money sage knows that to build wealth, you’ll need to get your feet wet. Whether investing in your 20s or 60s, you might make a regrettable decision or commit a newbie mistake – and thus suffer the consequences.
To help you avoid mistakes, we’ve rounded up some horror stories about investing in real estate and the stock market, newbie boo-boos and lessons learned.
Diversification Spreads Risk
When Steven Donovan opened his first Roth IRA, he included only Lehman Brothers stock in his portfolio. The reasoning was that he had interned at Lehman Brothers in college. Unfortunately, the financial services firm went bankrupt, and the stock plummeted to zero.
“I had no idea what I was doing,” Donovan, who is a money coach at Even Steven Money, says, laughing. “It opened my eyes to just how risky individual stocks can be.”
Lesson Learned: Diversify, diversify, diversify.
“An individual stock can go down to zero, so make sure not to put all your eggs in one basket,” says Donovan. And while you can’t prevent a stock from losing its value, he points out that you can limit your risk by keeping only a small percentage of your investments in individual stocks.
Invest in a broadly based index fund that tracks the S&P 500 or total stock market. “That way, if one company goes bankrupt, it’s such a small percentage that it won’t have a major effect on your holdings,” says Donovan.
Sometimes, It Hurts to Be Neighborly
Michael Dinich and his partner purchased land in rural Pennsylvania from their neighbor. The thing was, the neighbor had a loan on the property and the bank that held the mortgage wouldn’t allow the parcel to be divvied up. So, Dinich and his partner decided to refinance the loan for their neighbor. That way, their neighbor could sell them a portion of the land.
“The neighbor didn’t owe much, and we felt it was a relatively risk-free investment,” says Dinich of Your Money Geek. “The worst-case scenario? We would end up with the land.”
Well, it turned into a nightmare. During the 4-year contract, the neighbor didn’t pay on time once. Dinich was forced to chase him around to collect payment. “Each time payments were due, the neighbor always had some fantastic sob story, and we felt guilty demanding payment,” recalls Dinich.
Lesson Learned: Don’t be too nice and avoid doing business with your neighbors.
Dinich and his partner felt they were doing the neighborly thing and charged a low interest rate. They never charged late fees they were entitled to.
“We missed out on using our money for better investment opportunities, and we weren’t compensated for the opportunity cost,” Dinich says.
Do Your Homework
When Jon Dulin started investing in the late ’90s, he invested in companies that he found interesting. One was the telecommunications company WorldCom.
“I bought in, thinking they were on the cusp of something big, and the stock was very volatile then,” recalls Dulin, a personal finance expert and owner of MoneySmartGuides.com. “When news broke that the company might merge with” telecommunications giant “MCI, the stock price jumped. As an 18-year-old, I was excited!”
The merger fell through, and the stock price dropped.
“As it was dropping, I was buying more shares,” says Dulin. “I didn’t do my research or keep up with the news. I just kept buying.”
Dulin continued to buy all the way down to $5. His original investment was at $40.
Eventually, news broke that the company was reporting falsified financial statements. The stock plummeted, and WorldCom filed for bankruptcy. Because Dulin held on to the very end, he lost $6,000.
Lesson Learned: If you are investing in individual stocks, pay attention to what is happening with the company and have an exit plan if the stock price drops. Because Dulin didn’t do either, he lost everything.
Vet Investment Advisors
When Jeanne Yocum began investing 30 years ago, she trusted an investment advisor to have her best interests in mind. She didn’t bother to read the prospectuses (documents that provide details about an initial public offering) that he gave her.
That turned out to be a huge mistake. If she had taken the time to do her homework and understand what she was getting into, Yocum would have realized the advisor was putting her into two very risky investments – investments that were meant for those with a net worth significantly higher than hers.
The $6,000 she gave him to invest with disappeared, but he enjoyed a large commission on both investments.
“I look back on that and wonder how much bigger my IRA would be now if I hadn’t essentially thrown away those early investment dollars,” says Yocum, author of the “Self-Employment Survival Guide: Proven Strategies for Succeeding as Your Own Boss.”
“If only I had done my homework, I would have realized how ill-advised this advisor’s recommendations were for me.”
Lesson Learned: Do your homework and ask the right questions.
If you’re thinking of working with investment advisors, financial planners or portfolio managers, ask: How will they be paid? Are they fee-only, or do they receive commissions on the products they sell? What fees are involved?
It’s important to know that the person you’re hiring is a good fit for your needs and has your best interests in mind.
Don’t Base Decisions on Emotions
Jim Wang and two partners invested in a handful of single-family homes in Kansas City, Missouri. To his dismay, the area’s economic prospects started to decline, one of the partners became distracted with other projects and things slowly went downhill.
The rents weren’t high enough, occupancy was low and the investment became a headache for all involved. Wang and his partners liquidated the properties at a loss.
Lesson Learned: Investing has its ups and down, and you need a plan to manage the downs.
“Whether it’s emotional tricks or mathematical rules, you have to have a plan so what you do isn’t governed by emotion,” says Wang, who is the founder of Wallet Hacks. “So with our investments, we should’ve created rules to immediately liquidate if we saw the prospects of the area go sour. We waited because we didn’t want to be rash, and in waiting, we lost even more.”
We hope that you gleaned some nuggets of wisdom from these horror stories and hard lessons learned that will help you avoid the same mistakes and invest with greater knowledge and confidence.
Have you had an investment horror story? What happened? Let us know in the comments below.
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