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Question:


What are the biggest mistakes you see people making with their personal finances?
-JustWonderingRandomly


Answer:


People often invest as though they’re diners looking at the next table and saying, “I’ll have what he’s having.” They’ll buy whatever is hot instead of assets that are less popular but more likely to offer the best value and long-term growth prospects. In fact, it’s the very hotness of hot stocks or bonds or commodities or mutual funds that can make them bad investments. Their popularity and the momentum they have generated often make them overpriced, and the more expensive they get, the more secure investors feel about the prospects for even further gains. What often happens instead is that prices plunge because they have gotten so high and because no one’s left to buy and prop them up.
 
They’ll probably kick me out of the Pundits, Commentators and Blowhards Union, but another common mistake that’s related to the first one is to uncritically trust the advice of so-called experts. Whether they are Wall Street analysts, portfolio managers, financial planners or members of the media, they may have more knowledge than the average person (then again, they may not), but they are just as likely as anyone else to be seduced by a hot trend, ride the momentum and forecast great things for an investment that has already had its run and is about to roll over. There’s nothing wrong with using these sources to gather information and advice, but it’s vital to be circumspect and rely on your own judgment, common sense and wisdom before making personal finance decisions.
-Conrad de Aenlle



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