Ways to lose money and destroy personal wealth by investing

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Valuethinker
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Ways to lose money and destroy personal wealth by investing

Post by Valuethinker »

I am building up a list. Threads here are instructive. Some thoughts:

- spend a lot of time listening to extremely bearish or bullish gurus. They would have put you into gold at $1000 in 1980. Or taken you out of stocks when the Dow hit 1300

- using leverage in investment particularly where the term of your margin is shorter than the term of your investment (essentially almost always the case). Leverage coming either from margin, or derivatives leverage. If you mortgage up your house it *may* work

- investing in private companies or private real estate where you are not directly involved in the management of the business or asset

- investing decisions made for primarily tax related reasons

- trying to 'call the top' or 'call the bottom' of markets in your asset allocation

- 'catching the falling knife' ie buying a stock of a company in distress. Nortel dropped from $120 to $25 so I shrewdly swept in. I think I sold it (for charitable purposes) for about 1 cent

- mistaking success at picking one stock as an ability to pick stocks

-assuming that a bubble (such as the tech bubble or a housing bubble) will go on forever. Getting 'panicked in' by the fear you will miss the boat

- jumping on the latest investment trend, the most recent top performing asset class (Emerging Markets, Tech Stocks, whatever)...

- holding onto your employer's stock in a bear market, because you believe in what you and the people you work with are trying to do. Generally having too much wealth in employer's stock (when you can get liquidity on it ie you have a choice)

- failing to buy a house when you can afford it and you are a long term holder (this is more controversial, but it was only accident I bought a flat in the mid 1990s in London, and that flat would now be worth 5x what I paid for it)

I have all of these t shirts, or if I ducked them it was only by blind luck.

Your thoughts? Any others?
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Re: Ways to lose money and destroy personal wealth by invest

Post by swimirvine »

Using Whole Life Insurance in any form as an investment.
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Re: Ways to lose money and destroy personal wealth by invest

Post by desiderium »

-buying advice from those who know the secrets of investing success.
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Re: Ways to lose money and destroy personal wealth by invest

Post by laughlinlvr »

Invest in a mutual fund that delivers more in dividends than it costs in fees. I once heard this presented by a guru as: "It doesn't matter what you pay in fees. What matters is what the fund delivers."
Investing - The hardest way to make an easy living.
berntson
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Re: Ways to lose money and destroy personal wealth by invest

Post by berntson »

What about:

+ Holding excessive amounts of cash because cash is a `safe' investment.
+ Using non-productive assets ( gold, art, wine, collectables, commodities in general) as investments.

Of course, a select few probably can make money buying wine, collectables, commodities, and such. But for most of us, these are all ways to quickly lose money.
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Valuethinker
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Re: Ways to lose money and destroy personal wealth by invest

Post by Valuethinker »

berntson wrote:What about:

+ Holding excessive amounts of cash because cash is a `safe' investment.
+ Using non-productive assets ( gold, art, wine, collectables, commodities in general) as investments.

Of course, a select few probably can make money buying wine, collectables, commodities, and such. But for most of us, these are all ways to quickly lose money.
If we wrote the former as 'long term, holding assets with a negative real return'-- your formulation is probably how most of us make this mistake.

On the second I tend to agree. To make money in 'rarities' like wine or art I think you have to know a lot about those markets, and even then that doesn't mean you make money.

On Commodities, I remember in the 70s a few people my parents knew speculating in them-- and generally losing their shirts. Gold too in the early 80s.
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Re: Ways to lose money and destroy personal wealth by invest

Post by matjen »

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Valuethinker
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Re: Ways to lose money and destroy personal wealth by invest

Post by Valuethinker »

laughlinlvr wrote:Invest in a mutual fund that delivers more in dividends than it costs in fees. I once heard this presented by a guru as: "It doesn't matter what you pay in fees. What matters is what the fund delivers."

I think there's something I am missing in that?. You mean a fund that pays out a higher dividend than it actually generates a return? Ie capital depreciating?

Because something like VG Total Stock Market it probably does pay out c. 250 basis points in dividend, but fees are around 7 basis points? So that would meet your criteria?
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Re: Ways to lose money and destroy personal wealth by invest

Post by berntson »

Valuethinker wrote: If we wrote the former as 'long term, holding assets with a negative real return'-- your formulation is probably how most of us make this mistake.
I like it. I do think these activities can be wealth destroying (in terms of opportunity loss) even when the real expected return is slightly positive, e.g. even if your savings account has a small positive real return, it's still no place for your retirement assets if retirement is 30 years in the future.

Commodity speculation seems to be alive and well, at least in certain areas. I talked to a guy back home with a ten-gallon hat who bragged about making and losing $40,000 in a single day speculating on commodities. Given that he works at a factory and his family is not particularly well-off, this is about the worst thing he could be doing with his money. The wild swings in commodities seem to be especially attractive to types predisposed towards gambling and excessive risk-taking.
Last edited by berntson on Thu Jul 17, 2014 9:32 am, edited 6 times in total.
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Quidnam
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Re: Ways to lose money and destroy personal wealth by invest

Post by Quidnam »

Valuethinker wrote:I think there's something I am missing in that?. You mean a fund that pays out a higher dividend than it actually generates a return? Ie capital depreciating?
I'm guessing what laughlinlvr intended would have been more clearly written as: "Invest in a high-cost mutual fund on the principle that it delivers more in dividends than it costs in fees."

As it happens, all of my funds deliver more in dividends than they cost in fees, but none of them are high-cost / active funds that are marketed solely on the basis of their supposedly exceptional dividend yield.
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Re: Ways to lose money and destroy personal wealth by invest

Post by Levett »

1. Not understanding who you are to begin with. As has been pointed out by many a writer, the markets can be an expensive place to find out who you really are.

2. Underestimating the value of compounding, even when rates seem "low."

3. Ditto for underestimating the value of reinvesting.

4. As Mr. Bogle himself has pointed out, NOT knowing when "Enough" is truly Enough.

Thanks for starting the thread, VT.

Lev

P.S. I midly disagree on purchasing a home, though I am a homeowner. This would be dependent on both where one lives and how one chooses to live--something I have learned from my sons! :)
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market timer
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Re: Ways to lose money and destroy personal wealth by invest

Post by market timer »

Spending so much time watching the market that it distracts you from your job, family, or education.
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Re: Ways to lose money and destroy personal wealth by invest

Post by Boglegrappler »

using leverage in investment particularly where the term of your margin is shorter than the term of your investment (essentially almost always the case). Leverage coming either from margin, or derivatives leverage. If you mortgage up your house it *may* work
Well, that would be better, but the real problem is the leverage itself. I listened to a CNBC American Greed episode about some crook, and it feature some poor woman who took a 57K home equity loan to make her "investment", using the thinking that if she could double or triple that amount, it would change her life since she'd be able to pay off her mortgage. Of course she lost it all.

If you're margined and you happen to hit a downdraft in the market, you're really screwed, especially if you happen to be rather fully invested. The whole point of this stuff is to get rich (or comfortable) slowly, because trying to do it quickly is too risky and usually ends up with a big loss. I think it was Buffett who said that rule #1 in investing is "Don't lose money" and rule #2 was to refer to rule #1.

Periods of success are dangerous to people inclined to succumb to this. I'm not a gambler, but in the few times I've been to a casino, and had a small "winning streak", I have felt the siren call of monetary aggressiveness. The thinking goes "You know, I'm pretty good at this. I've only been making one mistake--I haven't been betting enough." Pride goeth before destruction.......
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Re: Ways to lose money and destroy personal wealth by invest

Post by Grt2bOutdoors »

Confusing the word "bond" as being the same equivalent as "safe". There is no "safe" in investing. To invest is to take risk. Sometimes it doesn't work, most times it will.

Confusing the word "speculation" with "investing". Speculation has no place in investing, it does however fit in with the term "throwing your money into the wind and hoping some of it comes back to you".

I've made neither of these mistakes, I can't say however family members have not. :oops:
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Re: Ways to lose money and destroy personal wealth by invest

Post by sschullo »

Most of the comments expressed I made at some point. The key to restoration is bucking up, taking responsibility and learn and get right back to investing. Blaming the system will also destroy wealth.
Never in the history of market day-traders’ has the obsession with so much massive, sophisticated, & powerful statistical machinery used by the brightest people on earth with such useless results.
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Re: Ways to lose money and destroy personal wealth by invest

Post by technovelist »

Assuming that the future can be predicted by looking at the past.
For example, assuming that the history of the US stock market since 1927 is a reliable guide to the future.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Ways to lose money and destroy personal wealth by invest

Post by Jeff Albertson »

This week's Buttonwood column is on this theme. B'wood praises Bill Bernstein's new book (Rational Expectations) & uses it for examples.

"NOBODY knows anything. William Goldman said that about the movie business but the same could be said for investment. History is replete with brilliant people who made calamitous mistakes."


No easy answers: The conundrum of asset allocation
http://www.economist.com/news/finance-a ... sy-answers
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Re: Ways to lose money and destroy personal wealth by invest

Post by freebeer »

- attempting to hedge "human capital" risk, and more specifically employee stock-option risk, by shorting stock in a peer company of your employer.
- come to think of it, "naked" shorting stock, period.
illflavor
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Re: Ways to lose money and destroy personal wealth by invest

Post by illflavor »

Thinking something is a can't miss opportunity/stock. This happened to me when I was young and it was a great lesson, as if I didn't learn it then I would lose a lot more money today
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Re: Ways to lose money and destroy personal wealth by invest

Post by jdb »

Paying a wealth manager an annual fee of one percent or more of assets to put assets in high expense funds and other high cost investments instead of DIY by reading books recommended on this site and buying low cost index funds and limiting the expenses and generating better returns.
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Re: Ways to lose money and destroy personal wealth by invest

Post by steve_14 »

Jeff Albertson wrote:This week's Buttonwood column is on this theme. B'wood praises Bill Bernstein's new book (Rational Expectations) & uses it for examples.

"NOBODY knows anything. William Goldman said that about the movie business but the same could be said for investment. History is replete with brilliant people who made calamitous mistakes."
This is a bit of a "circular" quote, because if you understand this, you actually know quite a bit. For example, you know the better someone claims to have the market figured out, the more you should ignore him. Especially if past performance is the basis for the view.
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Re: Ways to lose money and destroy personal wealth by invest

Post by pkcrafter »

Thanks VT, good post.

*Believing you've got it all figured out.
*Going 100% in anything implies you believe you have figured it out.


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Re: Ways to lose money and destroy personal wealth by invest

Post by avalpert »

Valuethinker wrote: - failing to buy a house when you can afford it and you are a long term holder (this is more controversial, but it was only accident I bought a flat in the mid 1990s in London, and that flat would now be worth 5x what I paid for it)
I'd strongly disagree with this - particularly as it is stated. As with any other consumption (as living space is) just because you can afford it doesn't mean you should buy it and thinking that not doing so is an investing mistake can easily lead you to justify overspending in the name of 'investing'.
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Re: Ways to lose money and destroy personal wealth by invest

Post by harikaried »

Valuethinker wrote:investing decisions made for primarily tax related reasons
I've heard people say "Don't let the tax tail wag the dog," but are there examples of doing/not-doing something purely for tax reasons?

Perhaps something like never rebalancing if you only had taxable investments?
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Re: Ways to lose money and destroy personal wealth by invest

Post by Bulldawg »

harikaried wrote:
Valuethinker wrote:investing decisions made for primarily tax related reasons
I've heard people say "Don't let the tax tail wag the dog," but are there examples of doing/not-doing something purely for tax reasons?

Perhaps something like never rebalancing if you only had taxable investments?
i.e. taking on a large mortgage thinking it's a great tax write- off ; ditto purchasing a piece of business equipment you don't really need BUT the w/o is advantageous. OR way back in the day when credit card interest was allowed as a w/o running up the expenses on the plastic !
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Re: Ways to lose money and destroy personal wealth by invest

Post by hoops777 »

Ego and thinking you are smarter than the market or listening to someone who thinks he is smarter than the market.
K.I.S.S........so easy to say so difficult to do.
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Re: Ways to lose money and destroy personal wealth by invest

Post by cheese_breath »

Keeping all your money in savings accounts, CDs and savings bonds because the stock market because "is fixed."
The surest way to know the future is when it becomes the past.
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Re: Ways to lose money and destroy personal wealth by invest

Post by Gambler »

- investing decisions made for primarily tax related reasons

yeah, learned the hard way.
bought at 1.50/share. went up to $3 in less than a year.
but I wanted the 15% capital gains rate so I didn't sell because I wasn't in long term capital gains territory yet.

after 1yr 1 day, I sold at $2/share :(

saving 10% in taxes cost me 33% :oops:
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Re: Ways to lose money and destroy personal wealth by invest

Post by cowboysFan »

Valuethinker wrote: - failing to buy a house when you can afford it and you are a long term holder (this is more controversial, but it was only accident I bought a flat in the mid 1990s in London, and that flat would now be worth 5x what I paid for it)
Doesn't the Shiller data show the long run appreciation in housing prices is less than half a percent real and almost certainly negative after fees(property taxes and maintenance)? Owning is still probably cheaper than renting, but I see no reason to expect the stock like returns implicit in the 5x increase.
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Re: Ways to lose money and destroy personal wealth by invest

Post by Startled Cat »

Valuethinker wrote:- investing in private companies or private real estate where you are not directly involved in the management of the business or asset
Can you please elaborate on the issues with private real estate? Seems to me like illiquidity and leverage can be big issues. Also, the managers' interests may not align well with investors', especially when they need to hit IRR targets to earn their promote. Are these the pitfalls you have in mind?
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Re: Ways to lose money and destroy personal wealth by invest

Post by black jack »

cowboysFan wrote:
Valuethinker wrote: - failing to buy a house when you can afford it and you are a long term holder (this is more controversial, but it was only accident I bought a flat in the mid 1990s in London, and that flat would now be worth 5x what I paid for it)
Doesn't the Shiller data show the long run appreciation in housing prices is less than half a percent real and almost certainly negative after fees(property taxes and maintenance)? Owning is still probably cheaper than renting, but I see no reason to expect the stock like returns implicit in the 5x increase.
Location (ie demand, and supply) makes a difference:
(a) my parents' home (in a small southeastern city) is probably worth less than when they bought it 30 years ago, after adjusting for inflation;
(b) my home (in suburban DC) would (probably) sell for about twice what I paid for it 12 years ago;
(c) my brother-in-law's home in west LA would probably sell for about 4 times what he paid for it 20 years ago.
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Re: Ways to lose money and destroy personal wealth by invest

Post by texasdiver »

Believing there is a shortcut to wealth.

I can't remember how many different relatives of mine have gotten robbed blind by scam artists selling the latest get rich quick scheme at conference rooms in seedy suburban hotels.

Fly by night gold mining companies
Real estate development partnerships that vanished in thin air
House flipping schemes
All manner of multi-level marketing schemes
Sovereign citizen tax schemes

I have a very big extended family and it is just a litany of horrors.
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Re: Ways to lose money and destroy personal wealth by invest

Post by LeeMKE »

anything on legs.

cattle ranching: How do you make a small fortune in ranching? Start with a large fortune.
Horse breeding: ROFL eggs on legs.

No fooling. Too many doctors and some lawyers all have bought into investments on legs and lost plenty.
The mightiest Oak is just a nut who stayed the course.
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Re: Ways to lose money and destroy personal wealth by invest

Post by willie838 »

LeeMKE wrote:anything on legs.

cattle ranching: How do you make a small fortune in ranching? Start with a large fortune.
Horse breeding: ROFL eggs on legs.

No fooling. Too many doctors and some lawyers all have bought into investments on legs and lost plenty.
ron bennington - radio show host i'm a huge fan of had an addage on this

-don't buy anything that eats while you sleep.

--------

resume thread progress. i'm taking notes on how to avoid the pitfalls of the get rich quick schemes :)
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Re: Ways to lose money and destroy personal wealth by invest

Post by placeholder »

LeeMKE wrote:anything on legs.
Remember ostrich ranching (because ostrich meat was going to replace beef)?
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Re: Ways to lose money and destroy personal wealth by invest

Post by VictoriaF »

There were some relevant ideas in the thread List of Worst financial advice (what not to do).

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nedsaid
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Re: Ways to lose money and destroy personal wealth by invest

Post by nedsaid »

Here are a few I can think of.
1) Following excessively bearish gurus. The stock market tends to be up 2 years for every year it is down. A person who is always bearish will be wrong 2/3 of the time. If you follow the optimists, you odds of being right are dramatically higher.
2) Chasing performance. Buying the hot stock or the hot mutual fund. This is a recipe for underperformance if I ever saw one.
3) Changing your investing style every time you read a compelling investing book. This is a variation of chasing performance. Usually when the book comes out, whatever investment strategy that is being touted has been working for a while. About the time an investor decides on a particular strategy based on a book, that strategy has run its course and due for a period of underperformance. The investor will usually give up about the time the strategy starts working again.
4) Trying to be somebody else. Reading Peter Lynch's books did not make me Peter Lynch. Reading about Warren Buffett didn't make me into another Warren Buffett. Be careful trying to copy strategies of successful investors. I want to be the best me that I can be.
5) Taking investment tips from people who know nothing about investments. In the late stages of a bull market, everyone is an investing expert whether they know anything or not. I have heard some crazy things over the years.
6) Letting your emotional self rather than your rational self rule your decision making. Emotions influence you to do opposite of what a rational investor would do. Emotions want to buy high and sell low. The rational investor wants to buy low and sell high.
7) Excessive trading. I have made the statement many times that the buy decision is a much easier decision than the decision to sell. The more times you trade, the higher your transaction costs and the higher odds of making incorrect buy/sell decisions. The more trading decisions you make, the higher the odds you will make incorrect decisions. I can't tell you how many times that what I sold did better than what I bought to replace it.
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Re: Ways to lose money and destroy personal wealth by invest

Post by Professor Emeritus »

1) Marrying the wrong person.


2) Using the fantasy word "home equity". A house is an asset, a mortgage is a loan. The buy rent decision on houses, cars seond homes is always complicated but the loan has nothing to do with the case.
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Re: Ways to lose money and destroy personal wealth by invest

Post by nisiprius »

Not realizing that you are becoming addicted to the endorphin rush of speculating, until you are hooked.

Thanks to jginseattle and Fallible I'm now reading American Sucker, by David Denby. I think it is a better, less guarded account of what goes on inside the head of someone who gets acculturated into the world of CNBC than anything else I've ever read. He is really willing to describe the sick intensity of his obsession. Not just roll his eyes and say, "oh well, you know, 1999-2002. Mistakes were made. Shudder. Well, let's put that behind us and move on..." I think he is an outlier in the frankness with which he speaks, but I doubt that he's unusual in terms of what happened to him.
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Re: Ways to lose money and destroy personal wealth by invest

Post by cheese_breath »

Any free offer that's going to show you how to make money in the market.
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Re: Ways to lose money and destroy personal wealth by invest

Post by Johno »

Valuethinker wrote: 1. using leverage in investment particularly where the term of your margin is shorter than the term of your investment (essentially almost always the case). Leverage coming either from margin, or derivatives leverage. If you mortgage up your house it *may* work

2. investing decisions made for primarily tax related reasons

3. failing to buy a house when you can afford it and you are a long term holder (this is more controversial, but it was only accident I bought a flat in the mid 1990s in London, and that flat would now be worth 5x what I paid for it)
Those three can be exaggerated IMO.
1. There's nothing inherently wrong with leverage. Almost everyone who does buy a house has a leveraged portfolio overall including that house. A home mortgage has the major advantage that the bank cannot ask for more collateral if the value of the house declines; whereas a broker can and does ask for more collateral (margin call) if the value of stock or futures position declines. This is important to fully consider, but does not IMO rule out using any other form of leverage ever. It especially doesn't rule out using the advantage of the individual investor to pay an implicit rate of LIBOR flat on derivatives leverage, way lower rate than margin loans, or mortgages. It depends on the specific circumstances. I don't think it lends itself to a general 'don't'.

2. That really depends how compelling the tax reasons are. For example if you're in later years and have highly appreciated assets you're not going to have to liquidate to meet living expenses, selling those assets generates capital gains taxes which under the US tax code your heirs would not pay if they sold the assets after you die (the tax basis resets to market value when they inherit them). So the reason not to sell such assets may be 'primarily tax', but in the limit it can be a very good reason. If the issue is risk management (say too high a % of assets in stocks) there are ways to address that besides selling assets.

3. As was stated, this kind of thinking may seem justified by personal experience but is not sound. Even if one knew in advance that their local housing market would be hot, they could still come out further ahead, strictly as an investor, by buying eg. 2*$250k houses and renting one out rather than buying one $500k house. The latter decision is to consume more and invest less. In fact I'd propose a replacement saying for this one along the lines of 'don't confuse investment with consumption when it comes to home buying'.
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Re: Ways to lose money and destroy personal wealth by invest

Post by cfs »

My first post in two weeks.

Good conversation.

Take out a mortgage and invest 100% of the money in the market.

Thanks for reading.
~ Member of the Active Retired Force since 2014 ~
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Re: Ways to lose money and destroy personal wealth by invest

Post by Jeff Albertson »

and most importantly, don't forget NBC's comedy channel, CNBC -

http://thedailyshow.cc.com/videos/uc9y5 ... ial-advice
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Re: Ways to lose money and destroy personal wealth by invest

Post by rca1824 »

swimirvine wrote:Using Whole Life Insurance in any form as an investment.
Where are you getting this from? This is not a fact.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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Re: Ways to lose money and destroy personal wealth by invest

Post by B'Falls_JT »

Thanks for the post VT!

A couple more to add:
* Investing in financial instruments that one does not understand.
* Overestimating one's tolerance for risk.
* When retired, failing to account for "sequence of returns" risk.

JT
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Re: Ways to lose money and destroy personal wealth by invest

Post by Taylor Larimore »

Ways to lose money and destroy personal wealth.
Ignoring costs.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
spectec
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Joined: Mon Jul 14, 2014 8:00 am

Re: Ways to lose money and destroy personal wealth by invest

Post by spectec »

1) Following a financial advisor's recommendation to buy Master Limited Partnerships

2) Doubling down by doing #1 in an IRA
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers
Professor Emeritus
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Re: Ways to lose money and destroy personal wealth by invest

Post by Professor Emeritus »

rca1824 wrote:
swimirvine wrote:Using Whole Life Insurance in any form as an investment.
Where are you getting this from? This is not a fact.
You are correct, He should have phrased it as "not realizing that whole life is the lousiest investment you can make".

I agree it is technically an investment in the same way that Russian Roulette is a game
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Phineas J. Whoopee
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Re: Ways to lose money and destroy personal wealth by invest

Post by Phineas J. Whoopee »

Choose your investments to express your political opinion.
PJW
rca1824
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Re: Ways to lose money and destroy personal wealth by invest

Post by rca1824 »

Professor Emeritus wrote:
rca1824 wrote:
swimirvine wrote:Using Whole Life Insurance in any form as an investment.
Where are you getting this from? This is not a fact.
You are correct, He should have phrased it as "not realizing that whole life is the lousiest investment you can make".

I agree it is technically an investment in the same way that Russian Roulette is a game
That's not true either. Whole Life is not a lousy investment. Where is your evidence?

Whole Life is comparable to a conservative mutual fund but with tax-free returns and a permanent, guaranteed death benefit.

This recent FEE article sheds some light on this: http://www.fee.org/the_freeman/detail/l ... the-system
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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