Before you start browsing this list we need to let you know that risk is a relative thing – and has nothing to do with your relatives. For some, putting any money into the stock market is risky while for others it is a natural way of investing. Also keep in mind that this list of 5 is about financial decisions, not only investment decisions. Most people know there are many ways to mismanage your money. So the rule here is for you to recognize that the reason these mistakes are OK to make is because you will have time to recover from them. If you can’t, then they’re not OK.
1. Taking on too much credit card debt.
This is one of the more common financial mistakes that really is the result of thinking you’ll always make the same amount of money or that nothing bad will happen to you. We all know it only happens to the other guy. So when the credit card monthly payments are greater than the available income and reach the unmanageable level, it’s fair to say it is a decision rather than a mistake. Recovering from the decision is not terribly difficult in most cases, especially if you are young enough. The good thing is this is a lesson that once learned, is not forgotten.
2. Holding on to your favorite stock for too long.
Anyone who had bought GoPro stock and saw it soar to more than $70 a share, then watched it drop to a soul crushing $5 a share can relate to this. True, it likely was a risk to buy the stock to begin with (depending when you bought in) but any losses you incur are tax deductible and taking such risks is a normal part of stock investing. For those who are contrarians, CNBC recently assessed the value of $1000 of Facebook stock bought during its IPO. Today you would have made more than $3600 in about 5 years. For the record, there were a lot of naysayers about Facebook’s IPO saying it would be a bust. No risk, no reward.
3. Listening to a friend’s financial advice.
A trusted friend is better than a stack of cash, right? Right? People have good intentions, but sometimes things don’t work out the way they planned. This is also true when talking about money and finances. There are the Bernie Madoff’s of the world, but you don’t put your closest friends into that category. If they give you a bad stock tip or tell you that the latest version of “Attack of the Killer Tomatoes” will be a blockbuster hit, and things don’t happen the way they thought, you have learned a lesson and still have a friend. Everything will be OK.
4. Going it alone in the financial decision making process.
This is the opposite of #3, where you either don’t have any friends you trust to take advice from or don’t have any friends at all. Time magazine reported back in 2013 that a research study showed that making financial decisions in isolation was a really bad idea, and that it was better to buy friends than go it alone. That’s pretty extreme. But this is the easiest risky decision to recover from because when you swallow your pride and admit you shouldn’t have gone it alone, you will find out who your real friends are – one way or another. As for buying friends, we are not big fans of the idea.
5. Taking out student loans.
This is the most controversial item on the list, and certainly will have its share of critics about it being “OK.” The problem with the current mentality is that the media and old geezers are portraying student loans as one of the biggest mistakes in the history of the United States. The truth is that taking out any loan is a risk, and singling out student loans is more subjective than objective.
From a financial perspective it can make a lot of sense if used properly. Taking out a student loan doesn’t mean you have to use it. You can bank it as a reserve just in case your finances become precarious later on. You can use part of it and bank part of it. But even if you use it all on legitimate college expenses, as long as you have a viable major field of study and a plan, a student loan is actually an investment. The debate about student loans will continue for some time to come, but for the purposes of this list, it’s OK to make this potential “mistake.”
By the way, Ana Maria Dinu wrote a research report in 2013 that gave us a formal definition of risk, just in case you wanted something more scientific to fall back on:
“The perception of risk with all its effects implies the awareness of the danger as well as the responsibility assumed by any individual when he/she states that she/ he solves an issue or takes a “risk”. Economic agents perceive the risk as an unfavorable result, a probability of loss, but still attached to a gain. In the field of investment, the risk is accepted if it is compounded with an additional gain that can be predicted with some probability.”