The BIGGEST Financial Mistake I Ever Made
Fee-for-service financial planner and founder of PlanEasy.ca
In this post I’m going to break away from the typical personal finance blog post. I’m not going to share a tip. This isn’t going to be some humble brag about how much money I’ve saved. It’s going to be quite the opposite actually. In this post I’m going to share with you my biggest financial mistake. One that cost me over 5-figures.
As a fee-for-service financial planner it’s somewhat embarrassing. Not many people know this story. This happened almost ten years ago, before I learnt everything I know about personal finance. I could have saved myself a lot of stress had I known what I know now. For that reason, I’m going to share my big secrete with you and I hope it inspires you to learn more about personal finance.
I’m going to share with you my biggest financial mistake and then I’m going to break down each of the mistakes I made… because like any BIG mistake there was more than one.
My Big Mistake
To set the scene we have to go back to mid-2008. I had been working for two years and saving diligently. My girlfriend (now wife) and I were looking for a home in Toronto. We needed every penny we could save for the down payment. We lived together in a small 500 sq ft one bedroom condo and each saved about $1,000 per month. From starting work in 2006 until mid-2008 I had saved up a little over $30,000. This was my portion of the down payment. It was sitting in my bank account earning a messily 4% (the normal interest rate at the time). This is where it all went wrong.
Foolishly I got impatient and in September 2008 I invest a bit over $30,000 in BlackBerry (I can hear your groans from here). Of course, my timing was terrible, and it dropped like a rock just a few weeks later. Then financial crisis hit in full force. Everything dropped again. Over the course of maybe 8-12 weeks my investment had lost $16,000. My down payment had been cut in half. I felt sick. Physically sick. For almost a week I felt like vomiting, it was terrible. Eventually I sold but the damage was done. I had to break the news to my girlfriend (now wife). I was embarrassed. I felt like I let her down. It was a terrible feeling.
I hope you can feel my pain… because it was painful. Half of the money I had worked so hard to save over the previous 2+ years had vanished. It was the biggest financial mistake of my life.
So what did I do wrong (other than have terrible timing)? Well I made a few mistakes and these are common mistakes that many new investors make…
Mistake 1: Investing With The Wrong Time Frame
Investing is about time at patience. If you have a long enough time frame you can take on more risk and wait out short term dips. But if you need that money within the next 5-7 years then you don’t have the luxury of time. You may not be able to wait for a recovery. If your investment falls you may be forced to sell for much, much less than it was originally worth.
In my case I needed my down payment soon. We ended up buying a house in early 2009. I didn’t have 5-7 years, I had 5-7 months! I had invested with the wrong time frame.
What I should have done is invested in something safer, something low-risk, something that would guarantee my principle, something that reflected my short time frame. Something like a high interest savings account would have been the right choice.
Invest with the right time frame and choose your risk accordingly.
Mistake 2: Investing Beyond My Risk Tolerance
Investing is also about understanding your risk tolerance. Even if I had invested with the right time frame I still invested WAY beyond my risk tolerance. I was invested 100% in equities. This is the riskiest you can be without taking on leverage.
Based on my risk tolerance my asset allocation should have been closer to 90/10 or 80/20. With 80% invested in equities and 20% invested in bonds & fixed income. Had I taken the time to figure out my risk tolerance I would have saved myself at least a little bit of money even if I had still made my other mistakes.
This is a common mistake I see new investors make. Quite a few young people are invested 100% in equities and for many of them this is probably beyond their personal risk tolerance. These new investors are missing the benefit of bonds & fixed income in their portfolio.
“Half of the money I had worked so hard to save over the previous 2+ years had vanished”
Mistake 3: Putting All My Eggs In One Basket
Investing is also about diversification. My portfolio was the opposite of diversified. I had all $30,000+ invested in just one company who sold products in just one industry. It’s hard to get more undiversified than that.
Investors are compensated for the risk they take, that’s why it provides higher returns over the long run. But new investors may not realize there are two types of risk. Systematic risk and unsystematic risk.
Unsystematic risk is specific to the company or industry you invest in. For example, if you buy shares in a chocolate bar manufacturer then your investment would be susceptible to cocoa prices. Cocoa prices go up and chocolate bars are less profitable, this causes share prices to decrease. Cocoa prices go down and chocolate bars become more profitable, this causes share prices to increase. This is unsystematic risk.
Unsystematic risk can be reduced by diversifying your investment across many companies and industries, ideally through a low-cost index ETF.
The other type of risk is systematic risk and it is unavoidable. Systemic risks are risks that affect multiple industries or the entire economy at the same time. Risks like higher interest rates, higher fuel costs, or political uncertainty.
As an investor you aren’t compensated for taking on unsystematic risk and putting all your eggs in one basket. The market assumes you’ll diversify your investments and reduce your unsystematic risk. If you invest a large portion of your portfolio in just one company you’re taking on a huge amount of unsystematic risk without any additional benefit.
This was my third mistake. In addition to investing with the wrong time frame, the wrong risk tolerance, I also invested without diversifying my portfolio. So when Blackberry’s share price fell there was nothing else in my portfolio to offset this decline.
This was the biggest financial mistake I ever made but in the end it was also one of the best personal finance lessons I’ve ever learnt. I will never forget that physical feeling of wanting to vomit. To this day I can still remember that feeling. I hope it’s something you never have to experience.
My desire to avoid this feeling was the reason I started to learn more about personal finance. It’s the reason my wife and I were able to pay off our mortgage early and why we were able to invest wisely over the last 9+ years. From all that knowledge I’m certain I’ve gained way more than the original $16,000 I lost in my big mistake.
That being said… please don’t make the same mistake yourself. You don’t need to lose $16,000 to improve your personal finances. Start learning about personal finance now or find someone to help you. Either way I hope you won’t make the same mistakes I did.
Financial planner, personal finance geek and founder of PlanEasy.