Financially smart people make dumb money mistakes, too.
Every once in a while, I like to ask financial experts to share their doozies. I think it helps readers who are intimidated by money to realize that everyone screws up -- even people who are, or eventually become, savvy about personal finance.
So I asked four money gurus where they'd want a "do over," a chance to go back in time and change one financial decision or action.
I wasn't looking for minor screw-ups or character-building mishaps that they later learned to cherish. I didn't want "success in the guise of failure" claptrap. I wanted goofs that cost them serious dough that they would happily undo if given a chance.
And they came through.
'I didn't follow my instincts'Before writing a string of best-selling money books, including his latest, "Fight for Your Money: How to Stop Getting Ripped Off and Save a Fortune," David Bach worked with his father and sister as a partner in The Bach Group, a unit of Morgan Stanley.
One day about a decade ago, Bach noticed that several of Morgan Stanley's top executives were selling shares as the brokerage company's stock price neared $100. Bach ran into his father's office and asked whether it might be a good time for the Bachs to sell some of their shares as well. No, his father said, the big executives were probably just diversifying.
The insider sales continued, so Bach ran into his sister's office. Shouldn't we sell, he asked her, if they're selling? Nah, she said. Surely the stock had room to rise.
Except it didn't. Morgan Stanley never regained that peak and is now worth about one-quarter of that top value.
Greed is the investor's Achilles' heel. That's why those who invest in individual stocks need to have rules about when to take profits.
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Bach kicks himself because he has found insider trades -- purchases and sales of stocks by top executives -- to be a pretty reliable indicator of future stock moves. Bach wishes now that he'd cashed out at least a quarter of the shares he held.
"I followed insider trades, but I didn't act," he said. "I didn't follow my instincts."
Going shopping with 401(k) money"Today" show financial editor Jean Chatzky is another prolific financial author. Her most recent book, "The Difference: How Anyone Can Prosper in Even the Toughest Times," explores how the wealthy and financially comfortable differ from the paycheck-to-paycheck and further-in-debt crowds.
But Chatzky admitted she wasn't always so wise about things financial.
"I completely botched my first attempt at a 401(k) because I didn't understand what it was," she confessed. "I was in my first job, an assistant editor at Working Woman magazine, contributing regularly, and my employer was matching, and yet when I switched jobs I didn't roll into an IRA. Nor did I look at moving the money to a plan at my new employer."
Instead, Chatzky made the mistake about half of all young job-changers make: She cashed out her 401(k). In those days, you could do it by default. Employers routinely closed out retirement accounts for workers who left their jobs, sending them a check with their 401(k) proceeds, whether or not the employees had asked for the money. Today, such automatic distributions are typically limited to accounts worth less than $1,000.
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"I waited. Got a check in the mail. And went shopping," Chatzky recalled. "I was thrilled -– until years later when I revisited what I should have done and calculated what my relatively small balance would have grown to in an S&P 500 index fund."
This will give you some idea of what Chatzky spent when she went shopping: $1,000 can grow to about $2,600 in 10 years, $6,700 in 20 years and $17,500 in 30 years, assuming 8% average annual returns (and there hasn't been a 30-year period in the modern stock market where equities have had less than 8.5% average annual returns over 30 years, including the Depression years, according to Ibbotson Associates).
Chatzky's little lost nest egg "wouldn't have paid for four years of college," said the mother of two teenagers. "But it might, eventually, have paid for one."