In sports, setbacks are inevitable. A star player gets injured, the matchup doesn’t go your way, or the ball just refuses to drop. These are unfortunate but often outside of anyone’s control.
The same holds true in personal finance. A recession hits, a promising career gets sidetracked by a layoff, or markets tumble without warning. These are real challenges, but they’re typically unpredictable and unavoidable.
Today, however, I want to talk about a different kind of setback—unforced errors.
These are mistakes not caused by economic downturns or external shocks, but by poor judgment, overconfidence, or lack of discipline.
I once heard that the key to financial success boils down to three things:
- Spend less than you earn
- Save as much as you can
- Don’t do anything stupid
It’s funny, but it’s also true. Financial plans rarely fail because of a single market event or slightly misaligned asset allocation. More often, they derail when the fundamentals are ignored.
Let’s walk through some of the most common unforced errors—broken into four key areas:
Investing
The investing world is littered with cautionary tales. Take Jesse Livermore, the great stock trader, for example. Mentored by J.P. Morgan, he amassed over $100 million by 1929 (over $1.2 billion in today’s dollars). But due to speculation, leverage, and overconfidence, he went bankrupt multiple times, and tragically ended his life.
Most mistakes aren’t that dramatic, but the lessons remain.
- Concentrated Positions: Individual stocks can go to zero. I’m going to say it again, because many people forget. Individual stocks can go to zero. Remember Lehman Brothers ($60 billion company at its peak), Enron ($70 billion), or Washington Mutual ($300 billion)?
A concentrated position may help build wealth, but over time, failing to diversify becomes irresponsible. The excuse that’s brought up is typically taxes. However, this is often a façade for investors not wanting to sell their winners. The emotional tug of holding onto something that has benefited you immensely is hard to let go of, but the best investors separate emotions from investment decisions. When you’ve decided it is a good time to diversify, don’t let the tax tail wag the investment dog.
- Timing the Market: For clarity, I’m not talking about making tweaks due to changing economic conditions, opportunities, or interest rates. I’m talking about the proverbial “sell and go to cash and get back in when things are better.”
This doesn’t work. Period. Most people buy high and sell low. Not only do you have to pick the right time to exit, but you also must pick the right time to get back in.
- One-Off Investments: Investors like the rush of new, exciting investments, but if you continue to add to “play money” accounts, you eventually end up with a messy, expensive, incoherent portfolio. Ask yourself: How does this particular investment fit within my overall strategy?
Bottom line: stay within your circle of competence. A rocket scientist may be brilliant, yet this intelligence in one sphere of life may not translate well into investing. In fact, overconfidence is often the domino that leads to drastic mistakes. “Pride goes before destruction, and a haughty spirit before a fall.” Proverbs 16:18
Tax Planning
The goal of tax planning isn’t to avoid taxes entirely – it’s to pay no more than you’re legally required to over your lifetime.
While there are advanced strategies that can fine-tune your financial plan, most costly errors could be avoided by simply reviewing your tax return carefully. Some real-life examples:
- Double-counting dividends from a 1099-DIV
- Forgetting to include a dependent child, missing out on the Child Tax Credit
- Misreporting a Qualified Charitable Distribution (QCD) as taxable income
Many of these unforced errors stem from simple oversight. If you’re not confident with your tax return, have a professional give it a second look.
Although this could be categorized as a “missed opportunity” rather than an unforced error, Roth conversions should be considered in low-income years. Consider conversions in the early career stage (before earnings have peaked), years in which you took a sabbatical or had a work stoppage, or the early retirement years prior to Required Minimum Distributions kicking in.
Estate Planning
Most people know they need basic estate documents—a will, powers of attorney, maybe a trust. But knowing and doing are two different things.
The most common mistake isn’t just a lack of documents; it’s scattered accounts with outdated beneficiaries. If something happens and you have 50 accounts with 50 passwords across 10 custodians, you’re not leaving your family a legacy – you’re leaving them a logistical nightmare.
Find an organization you can trust. Then simplify, consolidate, and make sure your beneficiaries are aligned with your wishes.
Insurance
If you have a spouse or children who rely on your income, and you’re not yet financially independent, life insurance and some form of disability coverage are non-negotiable. I speak with a lot of parents who are raising young kids, and these parents are often shocked at how inexpensive term life insurance is.
Death or disability is not an unforced error, but failing to plan for it is.
Perfection is Not the Goal
One doesn’t have to be perfect in the various financial planning areas. But if you can sidestep the unforced errors—by being disciplined, thoughtful, and proactive—you’ll have gone a long way toward building a successful financial future.
As always, let us know how we can help you avoid these unforced errors.
