Capitalist Investor

The 5 Most Costly Financial Mistakes DIY Investors Make, Ep. 326

• Strategic Wealth Partners

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On this episode of The Capitalist Investor, Tony and Derek break down the 5 most common financial mistakes they see from DIY investors—and why avoiding professional guidance can cost you big time in the long run. From waiting too long to save, to misusing your 401(k), to failing to plan for taxes and estate issues, they walk through how each mistake impacts retirement.

They also share real-world case studies, client stories, and practical strategies to help you avoid these traps. Whether you’re just starting out or closing in on retirement, this episode will help you rethink your financial strategy with clarity and confidence.

📩 Got questions? Reach out at info@SWPconnect.com

Ever wonder why DIY investing often ends up in disaster? Well, today on The Capitalist Investor, we're going to expose the five financial mistakes that impact most people's retirements, all because they avoided working with a financial advisor. Heard. All right. Tony, how are we doing today? Welcome back. Yeah, man. Again on assignment. But no, man, it's, hot up here in Cleveland. It is. So went from 70 to 100 degrees, like, over the course of a week. And let's just, you know, par for the course around here, I guess. But today we are going to talk about the five financial mistakes. That people make because they avoid working with a financial advisor. So with that being said, mistake number one, they wait too long to start saving, right? They don't save enough and they don't start early enough. Yeah. And that's a problem because you only have, a finite amount of time to save money while you're working, because when you're done working, you're done earning and you're done saving, and then you have to start spending because you don't have a job anymore. So that that is the big thing. And then also the power of, you know, exponential growth in your portfolio compounding. Right. So I did a little, a little, little thing here. So let's assume that everybody is going to retire around age 65. So the goal is retire at age 65 and everyone saves $500 a month and averages 7% rates of return. You know, something modest, you know, if you invested in the S&P 500 over the last, God, 20, 30 years, you definitely made more than that. Right. But so I'm just trying to, you know, have a modest rate of return. Obviously, these numbers would be a lot better if I did ten, nine, 10 or 12%, but let's use seven. If you started at age 30 and you had 35 years to save, you'd have 900 grand. Now, if you procrastinated and you waited five more years, you started saving. At 35. That 900 turns into 600, right? You missed out on $300,000. And what is that 6000 times five, right, is, you know, six. What is that? 6000 per year times five is 30 grand. 30 grand of saving cost you $300,000. All because of those last five years going into retirement. That you save that 30 grand is exponential growth. And then if you wait till age 40, you got 400 grand. What a big difference, man. So 500 is just a number. I don't care if it's 100 bucks. I don't care if it's 1000 bucks. I don't care if you max out your 401 K, but you can't. You only have a finite amount of time to save while you're working, so do it. I don't care if it's ten bucks or a thousand bucks a month, right? Yeah. For sure. You know, I think, you know, we talked to a lot of, like, children of clients, you know, and, you know, you know, they're usually, you know, mid 20s or something like that. And, and. Yeah, the, the easiest thing to do is just to peel off something, even if it's 50 bucks a month, at the start. And, you know, I also tell people not to get crazy with it, right? Like your first job out of college, you don't need to save, you know, $500 a paycheck, right? You're probably, you know, buying stuff for your apartment, all that good stuff. We're saying just get used to the idea of, say, peeling something off and saving it. But that that is just going to be a, an excellent tool for the rest of your life. And the compounding, like Tony was talking about, is just so important. So even if you get something in there, early in life is going to be a huge advantage. You know, even starting with you know, even if it's a small amount, you know, starting with, you know, 50,000 bucks in your 401 K when you're 30 instead of zero, that's going to have a huge impact on your, on your, retirement. Right. And you know what? As you mentioned, the 401 K, I was actually talking to a client the other day, about like different savings strategies, things like that. And the first thing that we, you know, talked about is like, what is their match. Right. I think they said 4%, you know, 100% of the first 4%. I'm like, we're definitely doing 4% right. We are because we're going to go get that free money. Yeah. Right. So again we have to these are the little things that we need to work on. Mistake number two thinking of 401 K as a complete retirement plan. All I need to do is save money and the rest of will take care of itself. All right. The 401 K is a very big component with with no doubt. Right. It is. It is the ultimate saving tool, especially on a tax deferred basis. It allows it's the biggest tool that we have to save the almost most amount of money in a tax advantage plan. Now I can separate a different show whether we're going to invest in the Roth or, traditional side of a 401 K, but we're just going to talk about just general saving today. So we must do more, though we have to understand diversification inside of the 401 K. We need to understand risk profile. How old are you? Are you 30 years old? Are you 60 years old? Different risk profiles are very important inside the 401 K. And then hey, when you do retire, guess what? There is a distribution strategy that needs to be thought of. It's a strategy. It's not just, hey, I'm just going to take money out. How do we take it out on a tax advantaged way? Right. So we want to be aware of the taxes and withdrawal strategies when it's time to start pulling out the money. When it comes to like, retirement regress and opportunities, we already talked about save more, save more and save more often or as soon as you can, but also having a plan. So this kind of ties in to the diversification, the risk profiling and the taxes. Having a financial plan in conjunction with your 401 K is huge, because the plan is going to help you understand, are you retiring too early? Did you retire too late? Should you have left? Should you have left yesterday? How much to spend? You know, post retirement. What is your budget? Look like? Do you? Did you save enough money to sustain your lifestyle? And then also maybe you have, like, a unique situation with pensions and lump sums. I want to do a separate show on that. But I'm, I still think we need to work on on the material. I have a good case study. You know, I just need to tie that together. But those are those are three just things off the top of my head on. It's not the only thing, but it is a big component. Yeah. For sure. You know, this is my favorite one, in this list because I come across it all the time. And the 401 K is also not an investment strategy. You know, I don't know how often I hear someone like, oh, well, you know, my 401 K is performing pretty well. It did, you know, blah blah blah 8% last year. And they have no idea how it's invested. You know, what is invested in you know, they kind of think like the, the just the plan takes care of the investing, you know, they probably got it, you know, invested somehow with, you know, the person that comes in once a quarter or something like that. But I see it all the time, you know, it's it is on you to make sure when you're saving in there, you're also, you know, have a, a decent, investment mix in there. Yeah. I mean, they, they have made it a little bit easier for maybe the DIY person or somebody who doesn't want to work on it, but they make those target funds. But I find that the target funds always underperform. They have over the last decade. I bet you they're doing well this year because they actually every time I see one, they have an over allocation to international exposure. International did very, very well this year, year to date. I believe it's outperforming, domestic markets, but it's the first time in a decade. Yeah, essentially. So we, you know, it's better to pick the hopefully your plan has individual funds, mutual funds that you can get into. Maybe they even have a brokerage link. Yeah. Where you can you know, that could be dangerous if you don't know what you're doing. But it's it's definitely a viable thing. Right. So, these are things that we, we think about, talk about and, you know, just understand that there's a lot of moving components, but saving is the key. And even if you pick a target fund, that's fine, right. But if you understanding again the diversification and the risk profile is very important. Yeah for sure. Number three, there's no tax strategy. Just, tax panic. Again and this could be like I hate tax as well. Paint. I always say paying taxes is a penalty of success. But a 401 K is a tool to help lower your taxes. If you go into the traditional side of the 401k. But you know, like we could argue that taxes are the lowest they'll ever be hard to lower taxes anymore, their lowest since World War one or something like that. And, we have, you know, huge debt problems, but, you know, lower taxes. We feel like we're taxed on everything. Money. We make money, we spend money, we buy things with, or there's taxes everywhere. So we can't escape it. But we can try and be smart with the tools and the knowledge that we know. So, breaking down, you know, tax efficient, ideas and, you know, like, Roth conversions come to mind right away. But I usually tell people that and this is what I find is that it's very maybe it's not a bad thing, but it's a little inefficient to do Roth conversion strategies while you're working, because these are probably the years that you're making the most money. When you're not making the most money is when you retire, typically. So that's when I typical. That's when I, when I work with clients, I'm looking at Roth conversion strategies post, you know, or you know, in retirement, beneficiary planning. You know that's another another thing and charitable gifting. These are all ways to help with with tax strategies. But the biggest tool that we all have our working is the 401 K. So that's one of the thing. What about you Derek. Yeah. So, I have written down here, mo money, mo problems. Yeah. So, you know, it's, you're going to need different levels of tax advice, different stages of life. And, you know, you know, something we've done through, you know, just thinking about topics we've talked about with, retirees over the years. Taxes are definitely one one of them. But, you know, if you're younger, you're basically on the other end of the equation. You can choose different vehicles to save to, and understanding how your situation relates to those different savings tools, you know, is going to be important. Like Tony said, you know, if if you know, if your match is 3% and, and all you can afford to save is 3%, you know that the 401 K is a simple move. But as you get older, you know, you you don't necessarily just need to dump every last savings dollar into your 401 K. Getting some tax diversification in there, is usually a good idea, depending on your situation. So, you know, it's not just tax strategies as you're spending in retirement or getting close to retire. You know, there's different tax saving strategies from, you know, from 23 on up. So it's it really does depend on your situation. Yeah. But having you know kind of a a game plan going into it, especially tax wise can drastically help you out when, when you finally do get to retirement. Yep. All right. Mistake number four. Timing the market and getting burned. I we've say it time and time and time and time and time and time again. Timing the stock market, you know, or. I'm sorry, time in the stock market is greater than timing the stock market because you might get it right once or twice, but it only takes one mess up. Yeah. To miss out on generational wealth. Right. It's just that five years of not in investing money. Look how much money you are behind. What if you decide like, oh my God, I heard this hot stock tip and I'm going to dump it all in like that's a that's a timing thing. But you know, that's also, you know, high risk different things like that. But when when we teach our educational classes we talk about this a you know, if, if you've missed like the five biggest returns in the stock market over the last 25 years, just five days in the last 25 years, your annualized rate of return goes from 9% to 7%. That's a big, big difference. And on the funny part of that is the biggest days in the market typically come within a couple days of the worst day in the market, and that's when the worst day happens. People panic, they go to cash and they miss that, that immediate pop back. That's what history has told us and shown us. So focusing on emotional investing, behavioral finance whatever you want to do, buy high, sell low. The biggest thing is that working with an advisor helps take some of this emotion off the table. Or hey, if you want to quote unquote play in the stock market, let's find an adequate amount for you to have a play account, a sandbox account, whatever you want to call it, something where if you lose it, I've done the calculations. If you take it from 50 grand to zero, 100 grand to zero, like it's not going to affect your retirement plan. So. Yeah, you know, we like Tony said, we do say it over and over again. But, I think obviously experience teaches you a lot, but the, you know, the longer that you're in this, line of work is, the more that you see, the more that you understand how how very true this is. You know, there's nothing wrong with with peeling off, you know, a responsible amount of money to, to make some stock picks, to make some more risky plays. But, you know, if you're trying to time the market, especially when things are volatile, I think it even becomes ten times more hard to predict the swings when when things get volatile. So that can derail your plans so fast. So please get a strategy and stick to it. And don't try to time the market because, you know, even if you win a couple times, that can almost be a bad thing because then then you get a little bit more aggressive and you make a timing mistake and. That or that or you get tied to something. So like, oh my God. The stock went up 100% last year. Cool. Sell it or sell half of it like divest right. Like you gotta you have to be smart. It's not always going to go up. Like, and you know, I've seen this with a lot of like 401 K plan specifically where they have individual stocks. You know, Sherwin Williams, progressive, you know, those those are the they actually the top two that come to mind and, it's very again, that those stocks, when people invest it in their, in their portfolio, in their 401 K's and dumped all their money, they became very, very rich. Yeah man. Dude, lock it in like lock in the gains. Like lock in something that diversify. Right. Because it's your one bad headline away from, you know, losing ten, 20, 30% of that portfolio. Yeah. You know, so again, just managing risk is is what a, you know, financial advisor is going to help, help you understand and, and hopefully listen to, mistake number five, no estate planning, you know, leaving a mess for the people behind. So this is very important. So beneficiary designations are just huge. 401 K's, you know, IRAs, life insurance policies, bank, bank accounts, checking accounts, like leaving, like having a beneficiary designation for all of these liquid accounts is so important. But then we get into the basic I call them the basic suite documents of estate planning, wills, living wills, power of attorney, durable power of attorney, health care, power of attorney. I'm going through this with with my mother right now. She's, has, like, early onset dementia and and, the durable power of attorney on on everything I get to, you know, I speak for her in most cases. This this is, this is the most important documents because it's it's it's it's okay to have your beneficiaries on all your liquid accounts. But when you have to start talking for people because they can't anymore, that is a big deal. That is that is the basic sweep. Now then we can get into more advance trusts and things like that. Does everyone need a trust? I can argue no. But you know, they it does help with some of like the non liquid stuff. So like, you know maybe houses and, and and especially if you have like maybe relatives or or beneficiaries that you wouldn't, you know I wouldn't trust them with 20 bucks let alone, you know, 500 grand if they're going to inherit something like that. So trusts are important, but it's, it's, it's, you know, I guess it's dependent on your situation. But I always say this, life events are very important for your beneficiary designations. Any time one of these life events happen, births, deaths, marriage, divorce, and maybe even moving from one state to another, you got to go through the whole sweep. You got to make sure your beneficiaries are up to date. You got to make sure that you're you're well, my mom moved from Ohio to Florida, about a decade ago. We had to change our will because Ohio as well, in Florida as well, they were not the same. Right? Right. So life events are extremely important. How about you, Derek? Yep. So obviously everything Tony just said there was, was perfect. I would say nine out of ten people, you know, listening to this probably don't need advanced, you know, estate planning techniques. But what Tony said there about you don't want to leave a mess. You know, I think it is. It is fairly easy to get very organized, on all of your accounts, making sure the beneficiary designations are correct and in order, and everyone can find them, you know, doing a couple extra things like transfer on death, non-qualified accounts can have a huge impact. You know, it it's annoying tracking all this stuff down, after, you know, something bad happens. So, you know, just having good records, and having your attention, you know, down in the beneficiary designations will make things so much easier. And make sure most of those dollars get get to where you want them to go. Yeah. And then like kind of a case example, here's one thing not to do, specifically on retirement accounts like IRAs, Roth IRAs, name a human being. Yeah. Okay. If you got a nice fancy trust, great. Don't name it at least as your primary name, a human being, hopefully, like a spouse or a relative or your primary should be a human being, even if it's like you're not married and, you know, things like that, and you don't have a spouse name and you got kids or nephews or whatever, right? Name them, because this is what I have seen in the past is where the trust was labeled the primary beneficiary. The custodian then looked at the trusts and said, man, I don't understand this trust. It's too ambiguous. Liquidate the account right now. So there was no spouse or continuation like they it it took $20,000 more in legal fees to save the liquidation of that IRA so that the custodians IRA and the clients IRA or I'm sorry, the client attorney and the the custodians attorney had to talk to each other and the cash registers or ring it up. Exactly. And so name human beings the contingent. Okay, maybe I can say the trust, but, the primary has to be at least a human being. And and I would even go as far as the contingents being the same. Because, again, attorneys don't I've never seen an attorney be like, wow, what a great trust. They always find problems with the the other attorneys trust every single time they've done. They never pat somebody on the butt and say, man, that's a heck of a trust. You wrote man. Holy cow. Yeah. Can I steal that? No, they don't do that at all. So and most of the time they've been written, you know, were written 30 years before. That's another thing. That's, without getting too far into a case example for me, just just keep it as simple as you can, you know, making things extra complicated because you think you're doing, you know, the right thing. You know, the, especially if you're older, you know, the people who are inheriting it are going to get the money. The you don't need to make it super complicated and, you know, get banks involved and things like that. Simpler is better. But, you know, just being organized, I think is, is, most of the battle there. Yeah. So to kind of recap this, you know, mistake number one, waiting too late to start saving. Number two, think in your 401 case, the only thing you need to do. Number three, tax strategies. Right. You know, there's some strategies before retirement and definitely after, timing the market. Don't get cute. And then estate planning, making sure that your, your T's are crossed, your eyes are dotted when it comes to what happens if you're not here tomorrow. So how do we tie this together? How does a financial advisor prevent all this? Well, it all starts with a financial plan, right? Because that'll give you the tax strat or I'm sorry, the investment strategies. Too much risk. Not enough risk saving enough spending enough like whatever that might be. Right. Tax strategies again before and after retirement. Retirement strategies. So like timing retirement. Properly. Do you have a pension? She take a pension or a lump sum? Saving, you know, into the right vehicles and the right amount and then your spending habits, like we need to dial all of these things in so that we make sure that, you know, about your last check on your last day. Because what if you live a couple extra days and then legacy planning, right, making sure that we're setting this stuff up so people, you know, don't have to worry financially about if you're not here tomorrow. And then one thing before, before we close, Vanguard did a study, you know, several years ago on how to quantify, financial advisors, you know, worth, like, what do they do for you? And they came back and and this is before Vanguard had financial advisors. And there are financial advising teams and things like that helping clients. They came up with an amount of around 3% because it starts with, you know, using low cost products like ETFs versus mutual funds, buying individual stocks. There's different costs for each one of these expense ratios. We're looking at tax advantaged vehicle like like accounts. Roth IRAs, traditional IRAs are saving money in cash. How do we optimize where we put our investments inside of each one of these buckets? Because they all are a little bit complex and they have tax advantages or tax non advantages. Right. I can we can have a whole discussion on that. But what else do we have. We have you know taking chips off the table if you hit a home run, rebalancing, most people just forget to rebalance. Maybe they have it on autopilot, but when you have your money in an IRA, there is really no autopilot anymore. They might have it set up in your 401 K, spending strategies, making sure that we are spending the right amount of money and also taking money from different pockets. You know, Roth IRAs are tax free, traditional IRAs are tax deferred. And then the non-qualified account, well, you only pay taxes on gains. So like, can I sell something at a gain and something at a loss to have a zero sum game. So understanding how we're going to create the paycheck on a tax efficient way is very important. And then ultimately building a financial plan is worth at least 1%. Because again, if you mess up and you retire at the wrong time, you too early. It won't catch up for you for a few years, but it will catch up to you. So just I call it a crystal ball, man. Like it helps you look into the future. So what are your thoughts there? Yeah. Couple, couple honorable mentions. You know, before we, get out of here, some things I've seen, you know, that is not always a bad thing. You know, I see a lot of people who want to, like, aggressively pay down debt. Yeah, might not be the best in your financial plan. Especially if we're pawn huge chunks out of our IRA 401 K accounts and then, you know, paying for, tuition for college, at the cost of not saving for retirement. Yeah, I, I have seen that. I mean, I know everyone loves their kids, but you got to make sure you can make it to the finish line, right? Because you can always finance. You can always finance, school. Right. Same thing with the house. Like, hey, I know a lot of people, some people are fortunate enough to have their house paid off before retirement. Some aren't. It's okay. Like, I mean, it's again, it will eventually be paid off, but it's cashing out money, like you said from your 401k to pay off a house just to get it done right. Let me run the numbers on that before you do it, because it might not be a bad idea, but like, man, let's give it some quantitative, some quantitative numbers behind it and make sure it works. Yep. For sure. All right there. All right. Well good stuff. That was that was an excellent list. I don't usually like to do, you know, list topics like that, but, but that was a good one. So if you guys got, questions, comments, concerns, hit us, hit us up at info at us connect.com, and we'll talk to you next week. The opinions expressed in the podcast. Are for general informational purposes only, and are not intended to provide specific advice or recommendations for any investment, legal, financial or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.