The cost of mistakes
Is the price of knowledge gained
From experience  

For many people, money is more than a way to measure the market value of a product or service. It can be deeply personal and meaningful.

Money may represent…

Years put in at a job…

Years of education required to develop marketable skills…   

Late nights and weekends spent refining a project instead of with spouses, children, and friends…

Hope for a child’s future…

Fundamentally, the quality of life a person hopes to live.

Mistakes happen. “If you aren’t failing, you aren’t trying” and “you win or you learn” are clichés for a reason. The road to growth has been, and forever will be, bumpy.

In finance, a mistake means someone lost money they shouldn’t have. For all of the reasons listed above, losing money unnecessarily can be an incredibly painful, sleep-depriving, relationship-damaging experience. There’s a reason so many divorces happen over finances.

I find it helpful to look at mistakes on a spectrum.

On one end of the spectrum are Acute Mistakes. On the other are Systematic Mistakes.

Examples of acute mistakes are paperwork errors; misunderstandings of contribution limits or deadlines; failing to understand the tax and penalty structure around an account or instrument; etc.

Acute mistakes are like missing a turn while driving to the airport to catch a flight. The lost resource - time - can’t be recovered, and there will be a near term challenge - potentially missing a flight - that must be addressed.

Paperwork can be corrected. Penalties and taxes can be paid. In some cases, there may even be relief built into the tax code so that a penalty can be avoided, or a mistake completely reversed.

Examples of this include the penalty waiver for a first time missed Required Minimum Distribution and the recharacterization of IRA contributions.

Systematic mistakes, on the other hand, aren’t just missing a turn on the way to the airport. A systematic mistake is getting on the wrong plane and finding yourself in a different country where you don’t understand the language, the laws, or how to get back home. Systematic mistakes are the result of a chain of errors, often starting with a problematic idea instead of a paper work error.

Systematic mistakes may take years to unwind and create lasting damage within a person’s finances that may alter someone’s quality of life.

Systematic mistakes can appear anywhere.

In estate planning, a systematic mistake would be having a hands-off approach to what happens to your money after you die. It’s such an abstract concept it can easily be brushed aside. But this can lead to, among other things, a failure to update beneficiaries on accounts. This can result in someone receiving an inheritance you didn’t intend for them to receive, or someone who truly needed the inheritance not receiving it at all.

In investment planning, systematic mistakes may take the form of investments that don’t align with a person’s needs, goals, or values. If someone has either low risk tolerance, or low risk capacity, or both, they should consider owning investments that align with those constraints.

But I frequently encounter people who base investment decisions on mass media articles. If someone gets financial advice from talking heads or online message boards, they may find themselves investing heavily in things like cryptocurrency, precious metals, meme stocks, or risky market sectors that tease abnormal returns at the expense of potential abnormal losses.

On the other side of the same coin, impersonal advice from mass media, talking heads, social media personalities, and even well-intentioned friends may lead to someone sacrificing all of their liquid savings in order to pay off a debt with a reasonable interest rate, or being so afraid of market risk that their money fails to keep up with inflation for years.

Acute mistakes help teach an investor how an account or an instrument works, and as such cultivate technical sophistication. The taxes, penalties, or paperwork headaches that result from acute mistakes are like a tuition payment for a course on technical expertise in money management.

Systematic mistakes teach us other lessons. They help us define our values.

Before I had children, a CPA who shall remain nameless convinced me to buy an indexed universal life insurance policy, or IUL for short, rather than contributing to an IRA or doing something really valuable like incorporating my sole proprietorship and setting up a Solo 401k.

This was around 2012. I had never invested before and was spooked by the recent train wreck of 2007-2009. My lack of financial literacy left me open to sales pitches that don’t hold up to mathematical scrutiny.

After owning it for a handful of years, the policy cash value was several thousand dollars less than what I had paid in premiums. Meanwhile, the stock market was nearing the end of the longest bull run in its history, which I had successfully missed with all of my premium payments.

That was a very, very expensive lesson. My financial values were more on the side of growth than safety. That narrowed the focus on what kind of investments I should make and what kind of accounts were best suited to my financial aspirations.

All these years later, I can find some gratitude for that experience in between spasms of regret. It was a mistake that has helped define my current mindset around not just my own finances, but around the money I manage for my clients.

I seek to understand their needs, goals, and values. I want to know what about life captivates their interest, and why they want the things they want.

Why go through that trouble – it’s a process that always requires several meetings and may last several months - instead of memorizing a sales script (which literally show up in my email inbox, unsolicited, all the time from services that exist solely for the purpose of training advisors on sales scripts)? An effective sales script could be a great way to push a product that may secure me a healthy revenue stream. It worked for my former CPA, after all.

But I love things that work too much. I love instruments that, when used correctly, make beautiful music with other instruments. There is a craft to using any tool and integrating into a financial plan. Learning that craft is both fun for me and beneficial to the people who come to me for help getting something they can’t get for themselves.

The downside is that you can’t get better at anything without making mistakes. The upside is that the product you purchase with the cost of those mistakes is mastery. Mastering your financial picture -understanding what you own, what you want, why you want it, and how to get it - produces compounding returns that are well worth the premium a person must pay to endure the failures they will encounter along the way.

If you are interested in starting to cultivate mastery over your own financial life, we’d love to hear from you.