1 Big Money Mistake I Should Have Never Made

By Markets Fool.com


Learn about and avoid mistakes that send your money down the drain. Image source: Getty Images.

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If you're kicking yourself for some boneheaded investing moves you've made, cut it out: We all err now and then. Even the greatest investors have made regrettable blunders. Warren Buffett, for example, apologized in his 1998 letter to shareholders, saying his "decision to sell McDonald's was a very big mistake. Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours."

Here are three Fool contributors with money moves they wish they had never made.

Image source: Getty Images.

Cashing out a 401(not OK)

Sean Williams: Many years ago I left an employer of multiple years to pursue other passions. This company had enrolled me in its 401(k) plan, I had been contributing about 3% of my salary each year toward the plan, and my company had been matching the contribution, giving my future nest egg a nice little bump.

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However, once I left the company I was sort of at a loss as to what to do with my 401(k). The next company I was heading to didn't offer a 401(k), so rolling it over to a nonexistent plan wasn't an option, and I didn't consult a financial advisor or bounce ideas off knowledgeable peers at the time.

The solution? I decided to cash out my 401(k) and put the money into my relatively nonexistent emergency fund. I didn't really think about the ramifications of cashing out my 401(k). Because I'm well below the 59-1/2 age requirement for withdrawing from a 401(k) without a penalty, I wound up taxed on the money at my ordinary income tax rate, as well as being charged a 10% penalty. What's more, it actually pushed me into a slightly higher tax bracket, causing me to owe even more in taxes.

Had I simply taken the time to talk to an advisor or looked around at my options, I would have realized that I could have just left my 401(k) where it was or rolled it over to a new account, such as an IRA. However, short-term thinking took over and I made a very poor financial decision.

Causing me further grief, I wasn't using a monthly budget, either, because I just assumed I didn't need one. If I had taken 30 minutes to formulate a budget, I could have saved what I wound up funneling into my emergency fund in less than nine months, which would have saved me a whole lot come tax time.

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Buying variable universal life insurance

Brian Stoffel: After graduating from college, I spent six years as a teacher in urban charter schools. I wasn't fine-tuned in financial matters, nor did I have the time to teach myself or care that much. So when our school's financial advisor approached me about buying a variable universal life insurance product -- and pitched it as a great investment and a way to lower college expenses for a future child -- I jumped on it.

Almost 10 years later, I wish I hadn't. I've paid $180 per month for the past nine years to get $500,000 in coverage that I could have for had for about $35 per month with term coverage.

"But what about your investments?" you may ask. Well, I was forced to invest in a mutual fund offered by the company that has my policy. That meant paying a 1.03% fee every quarter. Not only has that fee eaten away at my returns, but the returns of the actively managed fund have been underwhelming, as well.

Based on my personal calculations, my own investing returns have outpaced this mutual fund's by 9 percentage points per year. That's an enormous difference. When we add it all together, if I had just gotten term insurance and invested the difference, I would have $8,500 more.

The only reason I'm continuing is because I'm close to 10 years with the policy, and at that time, I can cash it out without penalty. Otherwise, I would have cashed out long ago.

Image source: Getty Images.

Buying penny stocks

Selena Maranjian: I've written about the dangers of penny stocks gobs of times. For starters, they're typically tied to small, unproven companies that feature more promise than performance. They're mostly about a great story: This company is close to curing cancer! That company is on the verge of a massive gold or oil discovery! Once the hoped-for event occurs, great profits will follow. Right now, though, these companies are very likely to be burning through what little cash they have.

Penny stocks are also easily manipulated. Dastardly types will buy lots of shares on the cheap and then start hyping the stocks in newsletters, online, and elsewhere. They'll get naive investors to snap up shares, sending the price up. Then these hypesters will sell their shares at the inflated prices, reaping profits. Everyone else will be left holding a deflated bag, likely having lost a lot of money. It's a classic pump-and-dump scenario.

Despite all these good reasons to steer clear of stocks priced below about $5 per share, I've still invested in a few -- because I was swayed by things I read about them, because I was drawn to a possible big payoff if the best-case scenario came to pass, and because even though I knew better, it seemed appealing to own, say, 1,000 shares of a stock that might double. Dumb, dumb, dumb.

As I look over my portfolio, which features more winners than losers and far more gains than losses, I nevertheless wince at many of my losers. And I marvel that almost without fail, my biggest losers are penny stocks. One I bought at $1.87 per share has fallen to $0.44, while another, bought at $4.20 per share, is trading near $0.33. Those are losses of, respectively, 76% and 92%. Ouch.

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Brian Stoffel has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. Selena Maranjian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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