Upticks: Five Financial Pitfalls to Avoid

By Jake Falcon on April 20, 2023

We often talk about financial strategies and actions to pursue, but there are also pitfalls you should aim to avoid. Falcon Wealth Advisors Financial Planner, Matthew Tomlin, CFP®, joined me on Upticks this week to discuss five common mistakes and how you can avoid them. A summary of our conversation is below. Make sure to listen to the episode to hear about Matthew’s recent wedding and honeymoon in wine country.

Jake: Thanks for joining me, Matthew. We meet with hundreds of people a year and often see pitfalls that trip them up. We are passionate about helping those people dig out from where they are and also helping other clients avoid these mistakes. Matthew, what’s the first pitfall we should discuss?

Matthew: The first pitfall we should discuss is failing to have an emergency fund or access to liquidity. Life and emergencies happen—cars break down, people get sick—and if you don’t have an emergency fund and access to money, you may have to sell stocks or bonds at an inopportune time or take on high interest debt from credit cards or other sources. Having an emergency fund gives you a buffer for when life happens.

Jake: Well said. Whether you’re working or retired, it’s critical to have cash on hand for emergencies. People get so caught up in stock market volatility, but if you have cash on hand and investments like bonds to cover your short term expenses, market volatility shouldn’t keep you up at night.

How much should have in an emergency fund?  Whatever makes you comfortable and gives you confidence that you won’t have to max out a credit card or liquidate stocks in a rough market environment.  

Our second pitfall is making emotional financial decisions. It’s really important to separate your emotions from big decisions. Fear and greed are two emotions that can affect anyone, but you don’t want to let them dictate your financial plan.

Some people get scared when the market goes down and want to sell all their stocks. Or they see their neighbor make money from a ‘hot stock’ and want to do the same. Feeling these emotions is normal, but that doesn’t mean we should act on them. That’s why our clients choose to work with fiduciary wealth advisors like Falcon Wealth Advisors. We’re an objective, unemotional third party that stays focused on the facts and your financial plan.

Matthew: Indeed, Jake. We recently met with a potential client who said she felt “paralyzed” when thinking about her finances and lives in fear of making mistakes. What tips do you have for keeping emotions out of your financial decisions?

Jake: First you want to recalibrate. If you’re experiencing extreme emotions, I would encourage you to take a deep breath or even meditate. I encourage people to zoom out and look at the big picture. Many of our clients are still averaging returns of 6-8% a year, even with bad years factored into the equation, like 2022. After you recalibrate, call your fiduciary wealth advisor and look at your financial plan with them. They can help you see that big picture and make sure the trajectory of your plan still looks healthy.

Matthew: I’ve often heard you tell clients, “This too shall pass.” It’s vital to be focused on your long-term goals and not short-term volatility.

Jake: What’s the third pitfall we see, Matthew?

Matthew: Not saving enough for retirement. This number is different for everyone, based on your lifestyle. If you’re younger, it’s probably prudent to save 10-20% of your income for retirement.

Jake: Yes, I tell people to save early and often. Aligning your spending and your values is key to saving enough for retirement. If you don’t believe you have any money to save for retirement, it may be worth exploring changes you can make, including cutting down on wasteful spending on items you don’t even enjoy—things like coffee, online shopping, etc.

The fourth pitfall to avoid is chasing fads. In recent years we’ve seen prices for cryptocurrencies, meme stocks, NFTs and more rise and fall. We don’t encourage our clients to chase these fads. We instead help them invest in companies that will hopefully be around for decades to come, ones that are growing their earnings—even if that growth consists of “hitting singles and doubles.” Don’t get caught up in your neighbor getting rich overnight on a random stock. It can happen occasionally, but it doesn’t happen to everyone. We don’t want to gamble with the portfolio you’ve spent your life building.

Matthew: That brings to mind to our second pitfall. We don’t want to get greedy because we see someone getting rich off a fad investment. And unless they buy and sell at the right time, they may not be rich for long.

Jake: Yes, you don’t want to be the last person to buy a fad investment, only to find out everyone is selling and no one else wants to buy.

Even an investment offered by the government, I-bonds, could be classified as a fad investment, in my opinion. The returns they offer can vary greatly from year to year and you don’t want to disrupt your financial plan to buy them.  I would consult with your wealth advisor before switching investment strategies.

For our Falcon Wealth Advisors clients, every piece of your portfolio is there for a reason. We strive to align your investments with your financial goals. So the last thing we want to do is risk the health of your financial plan for a fad investment.

Matthew: Our fifth financial pitfall to avoid is failing to diversify your portfolio. If you don’t, you could experience outsized losses during years like 2022. You should own stocks and bonds from all different types of companies, different sized companies, companies across business sectors, etc.

Your investments also need to be diversified for tax purposes. If all of your retirement savings is in a pretax 401(k) account and a pretax traditional IRA, you will have to pay ordinary income taxes on any withdrawals and be subject to Required Minimum Distributions once you’re in your 70s.

It’s prudent to also have money in tax-free accounts like Roth IRAs and taxed as you go brokerage accounts. If you have money in these three buckets—pretax, tax-free and taxable year by year—your withdrawal strategies in retirement will be a lot more flexible and you can avoid being in a higher-than-ideal tax bracket.

Jake: For our team at Falcon Wealth Advisors, building diverse portfolios for clients means we own dozens of different types of stocks. It makes sense that sometimes some of these stocks will be lower than others, but it’s not uncommon for clients to ask us if we’re going to sell a stock that hasn’t been performing well. For us, selling low rarely makes sense. Selling a stock when it’s down means you’re potentially taking on more risk and could miss its rebound. Our primary goal is to have the portfolio grow as a whole and meet the client’s target rate of return.

We won’t hesitate to sell a stock if we no longer look at its fundamentals the same way we did when we bought it, but overall, we of course aim to buy low and sell high. A diversified portfolio means you will have stocks that are up and stocks that are down.

We diversify because we can’t predict the future. And that’s why we diversify investment vehicles as well. We don’t know what tax rates will look like in 20 or 30 years, so you want to have money in those three different types of buckets. It’s usually a mistake to have all your eggs in one basket.

Again, here are the five financial pitfalls to avoid:

• Failing to have an emergency fund and access to your money
• Making emotional financial decisions
• Not saving enough for retirement
• Chasing fads
• Not diversifying your investments and investment accounts

Thanks so much for joining me, Matthew. If you want to learn more about how our team of fiduciaries can help you avoid these pitfalls and prepare for the retirement you want, please contact Falcon Wealth Advisors today. You can reach me directly at Jake@falconwealthadvisors.com.

Clients choose to work with us to enhance their financial literacy and explain exactly what their financial plan means to them.

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.