The worst money mistakes these top advisors have seen investors make

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Irish author James Joyce wrote in his novel “Ulysses” that a genius makes no mistakes. “His errors are volitional and are the portals of discovery,” he wrote. Talk about hindsight being 20/20. Joyce’s spin aside, mistakes can indeed be learning experiences — and we all make them, especially when it comes to finances.

Financial advisors make a living trying to help clients steer clear of error when it come to managing money but mistakes do happen. Sometimes it’s a matter of sage advice not taken, other times entrenched bad habits or beliefs that just won’t yield to common sense. We asked advisors from firms that made the FA 100 list what the worst money misstep they’ve ever seen a client or other investor make was. Their replies follow.

California Financial Advisors, San Ramon, California

• Michelle Perry Higgins, principal: “Individuals who believe ‘this’ stock market correction will be different and try to market time. It’s easy to jump out of the equity market but extremely difficult to have the discipline to get back in.”

• Mark Pitre, principal: “The worst thing I have seen a client do would be liquidating $120,000 from an IRA account, in order to pay off approximately $50,000 in credit card debt. The fact is that most people do not realize how costly debt can be, especially as they approach retirement. Debt is what causes delayed retirement, uncomfortable retirements and people being unable to retire. It is an ongoing ‘worst thing’ that I continue to see.”

• Tom Powers, principal: “Taking a large IRA withdrawal to pay off a tax debt — but using the funds to buy an RV.”

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Dana Investment Advisors, Waukesha, Wisconsin

• Mark Mirsberger, CEO: “Besides selling all their equity exposure in March of 2009 and remaining in cash because they were afraid, it’s probably buying and holding stocks all the way to zero, thinking they are cheap and can’t go any lower.”

Gofen & Glossberg, Chicago

• Charles S. Gofen, principal: “The biggest error people make is spending too high a percentage of their savings each year on the assumption that they won’t live long enough to run out of money. We emphasize a ‘sustainable rate of withdrawal’ to protect against this happening.”

Montag & Caldwell, Atlanta

• William Vogel, president and CEO: “You have clients react emotionally to current market sentiment and make mistakes in terms of getting fearful … or too excited at the wrong times … instead of focusing on what the long-term investment plan for them, their best plan would be. … You counteract [emotion] with facts and history. Coming from a largely institutional management background, we have a lot of that data and provide that at regular meetings.”

You have clients react emotionally to current market sentiment and make mistakes in terms of getting fearful … or too excited at the wrong times. … You counteract [emotion] with facts and history.

William Vogel

president and CEO, Montag & Caldwell

“You have to admit that investing in the markets is cyclical but [take] a long-term outlook, meaning 10 years-plus, which is what you should be talking about with clients, anyway The U.S. markets have always provided good long-term returns. The longer out you look, the less current volatility really matters. … Maybe you can’t if someone is 85, but, for younger people certainly, the focus should be more on investing and less on speculating on current cyclical market movements.”

Salem Investment Counselors, Winston-Salem, North Carolina

• Dale Brown, senior executive vice president: “A consistent, repeating thing that I’ve seen for a long time is people attempting to time the market. … I just think that trying to time the market is a fool’s errand. I think it’s the daily news cycle, to some extent, that leads people to think ‘I need to get out, I need to get in.’ Stocks are one of the few things people want more of when prices are high and less of when prices are low. Without exception, folks never get back in at lower prices than when they got out. When they do return to the market, the market is invariably higher than their exit point.”

“A specific instance: Back in the early 90s, I had a client who became a very dear friend over the years. A bunch of his buddies had got involved with an investment firm that allegedly specialized in currency hedges. They … were making unbelievable monthly returns. I checked out this firm, could not find out anything about them. I recommended to my client that he not participate. Eventually he committed some funds to the scheme. One day, no one answered the phone at this firm. It turned out to be a Ponzi scheme. If it seems too good to be true, than it probably isn’t.”

• David Rea, president: “I don’t have a horror story. I think the worst thing I see people do is say ‘I just need to get out of the stock market and I’ll get back in at the right time,’ and they just never get back in. Everybody’s got to be able to sleep at night but that’s typically a bad long-term decision.”

Tom Johnson Investment Management, Oklahoma City

• Cory Robinson, vice president and portfolio manager: “I think the biggest mistake that we commonly see people make is overspending and/or under-saving. This one is especially problematic for high earners. Professionals who make and spend in the low- to mid-six figures will have a tough time saving enough within only 401(k) plans or IRAs to replace that income in retirement — especially with interest rates and dividends somewhere south of 2%.”

“Simplistically, to generate $200,000 in income at 2% would take a portfolio of $10 million. Even using the 4% rule (i.e., you can spend 4% of your portfolio value every year with only a small risk of running out of money), it takes a $5 million portfolio. Even if you start maxing out your 401(k) [contributions] at age 23 and continue until 65, it still takes annualized returns of more than 7% to get to $5 million (ignoring company matches and increases in limits over time).”

“The 7% is on the high side of possible, but not a layup, and how many 23-year-olds do you know who are contributing $18,000 to their 401(k)? This doesn’t take into account that keeping all of the savings in tax-deferred accounts could lead to tax issues down the road when you start taking distributions. Better to diversify your savings sources with a mix of taxable and tax-advantaged accounts, so you can better manage income and taxes down the road.”

Wescott Advisory Group, Philadelphia

• Grant Rawdin, founder and CEO: “Being too cavalier about investing money without strategy or reasonable consideration.(Investing in businesses without business plans or reasonable chances of success, rationalizing major purchases — vacation homes, art, cars, etc. — as investments when they’re not. Every dollar you own has a mission to compound your wealth and achieve whatever goal or security you desire. Don’t waste the opportunity.”

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