I thought I had some good points to contribute, and stories to tell even though I’m nowhere near retirement. I really have had a few bad investment mistakes along the way, and I’m sure I’ll run into more in the future, but that’s one of the points of MyInvestingBlog.com – figuring this stuff out!
The BAD investments include:
1. I crafted a post earlier this month that touched on the get rich quick schemes I fell for. This was throughout my teenage years I fell for these ideas, what can I say, I was young, dumb and WANTED the money. At least I had the drive to push forward on it. I didn’t sit and let life come at me! Unfortunately, believe it or not, none of them paid off.
2. In 2003 I took a $10,000 loan out on my 401k to fund a possible startup company that ate it and along with it my money. I wasn’t interested in a retirement portfolio at the time. I knew I should put money into it, and it was amazing that I had that kind of money in there to borrow in my early 20’s, so in looking back, I applaud myself for putting the funds in originally. However, I’m still not through paying it off yet and it hits me several ways I didn’t research when I initially came up with the idea. The first way it cut me was that “loan installment fee” of $100 right off the bat. Then there was the double taxation:
“If you recall, your retirement plan contributions are made on a pre-tax basis. This means that you realize a tax break when making contributions to the plan, and you’re then taxed in the future when you take money out of the plan. Unfortunately, when you take a loan from your plan, you may be subjecting yourself to additional taxes.
While regular 401(k) contributions are taken out of your paycheck on a pre-tax basis, the loan repayments are not. This means that you are taking pre-tax money out of your account`and then repaying it with after-tax money. This can result in some of this money being taxed twice.”
Third point of #2 is the whole loss of interest in the compound interest structure from taking 10k from the 401k at age 23. Bad idea. As I’ve still not put everything back yet and won’t till 2010 on the current payback schedule, I’m losing big $ in the $ I have compounding in there. Yes, I may still be adding 10% per paycheck to my 401k, but 8% of that goes back to the loan I took out each check too, further pushing back that number. Lastly, that 8% they entice you to pay back to the 401k loan IS money you’re paying back to yourself, but you’re paying that with the after tax money now furthering that gap. I wrote an article on my brothers payback schedule for his wedding last week that shows how much you’re losing by digging into the nest egg now.
3. I gave Day Trading a shot when I was 19 and had a full-time job already. I breezed through 5k there in nothing flat. I couldn’t devote the time needed to watch the market, the tools or knowledge of how the software worked, nor the terms and pieces I needed to utilize (short selling, day orders, hard stops, long puts, etc.) the idea properly. My money was eaten up so fast from transaction fees and losses it’d make your head spin. I don’t deny that this may work for some, but you have to have the tools to do so, and I wouldn’t recommend starting in the stocks with anything less than $25,000 or the fees are just going to eat up any profits you make.
4. Undercut my ROTH IRA growth potential by cashing it out and rolling it into a land investment deal. Again I applaud myself for even contributing to this at a young age, so kudos to myself there, but I DIDN’T yet understand my undercut to my retirement (see #3) and should have realized that I’d be better off just sitting out this investment until I had enough money to put towards it. This actually still might not be a bad idea though. I’ve restarted another ROTH IRA in the interim with Edward Jones and the land deal is in a good area that is selling like hotcakes now, but still not a good idea to dump the NEAR sure thing in a ROTH IRA.
5. I’m still not convinced that my Variable Universal Life insurance policy is a completely lost cause yet. I haven’t gotten any responses on the post I left for it last week and it sounds like I’ve sat out the bad years that the agent is taking her cut of the $ as I’ve been investing blindly for 4 years now, the mutual fund that is wrapped in it is almost catching up. Granted I’ve put in almost $10,000 in that time frame and the mutual fund value is nearing that mark giving me a o% gain over the past 4 years, but from what I’ve read, it might be worth sticking around for. I know the Suze Orman folks (TeachToRich, Queercents, Flexo, Select Quote) folks will tell me always recommends term life insurance and investing the rest of the $, but I’m not completely sold yet. I try to take everything with a grain of salt, so if someone has some knowledge to share, or comparison to share, please let me know. I don’t know if I can consider this an “investment” but I would like to hear an opinion either way on it if someone has a term policy that is simple while investing the rest. Clearly a 0% gain isn’t good, but am I over that “paying the agent” phase now? Will I see $ in the future here? Please let me know, but for now it sits in the “bad investment decision” tub.
6. Co-signing a student loan for a “then friend” saving him $8,000. He gave me $3,000 to co-sign with him as I didn’t think I’d find myself needing a very good FICO score to secure a new house for my new child and new easy-make family. When I signed on he told me that I’d not have to worry about it hitting my credit; I didn’t really care that much then. I didn’t own anything, didn’t have debt, and didn’t plan on moving in with the girlfriend and settling down within the next year. Well, long story short, the friendship was shot because he pushed me to sign the papers again the following year as I had “verbally agreed” to help him pay for his college. Yes, money between friends shouldn’t happen unless you’re 103% (Yes one hundred and three percent) certain of the terms and the effect it will have on your relationship. I was honestly best buddies with this guy and it all went out the window for $3,000. Strange how money works. So this was a bad decision on a personal AND a financial level both.
I’m sure there will be more in the future that I’ll hit myself on the head for, but experiencing is the best way to learn. Keep a clear head when making the financial decisions and think them out rationally or you could find yourself making the same mistake twice, I’m sure I won’t though thanks to these hard learned lessons.