Biggest Financial Blunders

[startupdoc]

My father, also a physician, has been the family's and extended family's personal hand-me-out for whatever financial issues they were having for the past few decades. What has this taught me?

1. Once you "loan" a family member money, you are unlikely to see it back.

2. Once you "loan" a family member money, that same person + other family members will likely come flocking to you for money indefinitely.

3. Do not "loan" a family member money before you set your own financial house in order.

4. "Loaning" family members money does not automatically get you better personal relationships with those same people. In fact, often it complicates things and makes things more awkward in the future.

5. WCI advised a while back: rather than giving out a "loan", you are probably better giving a certain amount of what they requested and explicitly tell them its a gift and you do not expect them to pay it back. I have yet to be approached by friends/family about money yet, but its inevitable. I think I will try this approach when it does happen.

Don't even get me started on family members that want to stay at your home for extended periods of time because of XYZ. Another difficult thing to deal with.

[AdamMGrossman]

Re loans to family members, I completely agree with startupdoc: If you call it a loan and do it without documentation, then it's almost certainly going to become a gift. Even if you try to formalize the loan with a note, including rate, term, etc., it's probably still going to become a gift.  I have experienced both myself, and in both cases it made the relationships worse.  Thanksgiving was today, and it was pretty crowded with those two elephants in the room.

WCI has the right idea: Since it's going to be a gift anyway, you might as well just call it that up front.  That way, you still may be disappointed at the request for the loan, but at least you won't be disappointed when the "loan" is never paid back.

[jfoxcpacfp]

ChristopherMD20 wrote:

@mitochondria If you don’t mind sharing, I’d be interested in your insight about dealing with the family situation. I am from a working class family with no formal education and many of my immediate and extended family members are in financial ruins. I am very guilible and I am a softie, but I am also extremely frugal. How do you suggest one deals with family members with their hands out? There are a subset of people I plan to help once I have my own financial house in order (parents, nieces) , but there are plenty of others who may target me.Click to expand...

1. Man, I sure wish I could, but I don't have any space in the budget for that right now.


2. I'm sorry, but I promised (spouse's name) that we would get our own financial house in order before making any loans, so it's out of my hands for about...10/20/30 years.


3. If you only knew how much I owe in student loans, you'd probably offer to loan me money!


4. In the interest of fairness, I've already turned down another family member and if I do it for you, I'll have to do it for him.


5. (Spouse) and I made a deal that if we loan to one side of the family, we'll loan that much to the other side of the family and, quite frankly, I just can't afford to do that.


6. I'm sorry, but I'm saving every cent I can for (the kids' college fund/help out our parents in the future/whatever) and I wouldn't be able to forgive myself if I fell short on that.


7. I'm sorry, but my financial planner will probably fire me if I do that and I don't want to lose that relationship. It's out of my hands.

[childay]

jfoxcpacfp wrote:

I’m sorry, but my financial planner will probably fire me if I do that and I don’t want to lose that relationship. It’s out of my hands.

Click to expand...

LOL

[Lithium]

I had a cousin start a GoFundMe account and sent links to all of us.  She was asking for help with medical bills, specifically for her kid's asthma.  Lo and behold, two months later, she comes home with a third puppy.  Did I mention that she and her husband are smokers?

Along those lines, on the rare occasions someone asks me for money, I like to rub in my stealth wealth and their crappy spending habits.

"I would, but I'm still driving a Honda Civic with over 100k miles, and some day I hope to get a Land Rover like you guys."

"I would, but people at work make fun of me for still buying my clothes at TJ Maxx instead of J. Crew."

"I would, but it's been too long since I replaced my iPhone.  How do you guys like the iPhone X?"

"I would, but I just had to cancel my cable package.  Can I come over and watch Game of Thrones?"

[childay]

"I would, but I'm only saving 85% of my income for early-retirement and I need to increase it so I can fit in on the WCI forum?"

[Hatton]

A friend of mine's office assistant actually asked for a loan so she and her husband could go gambling.  He actually loaned her the money.

[Slav4ikMD]

Starting to read WCI too late, but better late than never!  Have always been fairly disciplined with money, but not disciplined enough (and still not perfect).

Paying cash for wife's second degree, which she has never used, which was predictable.  Oh well.

Buying a starter home ended up being a wash financially, but was a good experience on a number of levels, so that was ok.

Agree that when one does most things right, the couple of blunders don't matter so much.

[Dont_know_mind]

q-school: I have thought about selling some property and allocating to index funds but there would be considerable capital gains tax (15% or more). I have a property I live in (3M), property outside of retirement accounts (10M), 2M debt on that and retirement account (1M) which is in cash allocation. So I have 1M debt currently (debt on property - cash in retirement account). The cost basis for the property is 2M so the CGT taxable component is large (6M). It makes selling not worthwhile and maybe this is a good thing.

hatton1: the narrative I suggested is that I used the debt productively, which is true to some extent. But you are right, I could have done it without the debt. The main thing I did right was identify asymmetric risk investments in property (low downside, high upside). I did particularly well in infrastructure and rezoning plays. Some of these properties were very cashflow negative for years, but then went up 5 times in the years after the infrastructure was announced. I was also very lucky, I am not sure this is replicable at all and I would not recommend it to anyone else. I do have confidence that I have enough investor knowledge now that if I started again I would do well. But things could have certainly been different and I was lucky.

With debt, thinking again about it, the main function it had for me was to tie me down. I have risk taking tendencies and the debt made me careful. The only time since internship that I didn't have debt was when I sold our house to upgrade. The lack of debt and my bungling a negotiation to buy another house caused me to make one error after another. We had 1.5M in the bank and we could have bought the house we were interested in for cash for 1.35 but I wouldn't budge and wanted 1.3M. Also at the time, my wife and I had another child. I am not sure if I was going through a mid-life crisis too as I turned around 40 that year. Anyway, after hashing up that negotiation, I refused to look at houses again and I got it into my brain that I would hedge the risk of property going up by a long US-dollar position.

I set aside 300k as risk equity for this and although I had never done a foreign exchange (forex) trade before, it unfortunately went very well and put in place a slippery slope to major financial loss that year. I was suddenly up 800k on the forex position as the USD had a major move that year. A property I bought I found out had done much better than expected and my net wealth increased a lot that year. This resulted in my ego swelling to a size that made it difficult for my wife to tolerate - I became a PITA (pain in the ******************) due to the large size my head had swelled to. I really needed to be relieved of the excess wealth to reduce my head size. I still could not face my initial error or buying a house as I was supposed to because houses in the area were shooting higher. Then I started futures trading and this did have a catastrophic effect on my account.

I managed to average down into a massive S&P500 short position and my account went from positive 1.2M to -800k, thus wiping out most of the equity gains I had ever made. This was painful to face up to, but it made me a tolerable person to live with again. My wife actually commented that she knew the very day that I blew up my account because she knew she could live with me again. Anyway, I was relieved that I would not have to move to a motel. Unfortunately, I also sold a house unnecessarily during this period also for about 800k which would be at least 1.6M now. So in terms of opportunity cost, I lost the same on that as the futures trading. But the futures trading loss was more painful and I learnt first hand about Kahneman's prospect theory (actual losses are more painful than foregone potential profits).

But most painful was buying the house that I had been avoiding all along. I sat down with my wife and told her "I can't do it, I have a gut feeling it will go down very soon". She gave me an ultimatum about stating when I thought this would occur and I said I was most convinced this would happen in the next 6 months. So further 6 months of housing market shooting straight up and then I had to face the day of reckoning and stump up 2.8M for a house I could have bought 3 years earlier before this whole disaster for 1.35M. Worse, I had lost 800k on trading to avoid this and also lost 800k on an investment property I sold during the period because my head wasn't screwed on properly. Buying that house for 2.8 was the hardest thing I ever did because it crystalized the extent of my mistakes.

So perhaps another narrative is that I needed the debt to keep my head screwed on correctly. My wife said "you need debt, you perform best under debt" and I said "I hate debt, it makes me miserable". But this was true, I do best when I am tethered down with about 2-3X income in debt. It is not enough to make me too stressed, but enough to stop me from doing anything too stupid.

Another narrative might be that I always had this potential to blow up because I am a risk seeker and combined with 2 particular erroneous beliefs, I was always going to have to take a very large loss to learn my lesson. That lesson was that I can and am often wrong. One of the great things about speculative markets is that they teach you to change your erroneous beliefs. You can get away with having erroneous beliefs in other areas of life (even as a clinician or academic) but trading leverage, you will come to certain truths or die. My erroneous beliefs were that I thought I knew something. And worse I thought I was special and that I could not lose. I think the movie  'inception' is an interesting depiction of how one core belief can lead to a multitude of other layers of beliefs and actions. I could say that a five sigma event occurred in terms of a horrible year, but actually the only five sigma event was my own string of errors based on flawed erroneous beliefs. And my own ego, which really needed to be deflated.

Speculating has been an interesting if somewhat painful path to personal growth.

 

 

 

 

 

[q-school]

Dont_know_mind wrote:

q-school: I have thought about selling some property and allocating to index funds but there would be considerable capital gains tax (15% or more). I have a property I live in (3M), property outside of retirement accounts (10M), 2M debt on that and retirement account (1M) which is in cash allocation. So I have 1M debt currently (debt on property – cash in retirement account). The cost basis for the property is 2M so the CGT taxable component is large (6M). It makes selling not worthwhile and maybe this is a good thing.

hatton1: the narrative I suggested is that I used the debt productively, which is true to some extent. But you are right, I could have done it without the debt. The main thing I did right was identify asymmetric risk investments in property (low downside, high upside). I did particularly well in infrastructure and rezoning plays. Some of these properties were very cashflow negative for years, but then went up 5 times in the years after the infrastructure was announced. I was also very lucky, I am not sure this is replicable at all and I would not recommend it to anyone else. I do have confidence that I have enough investor knowledge now that if I started again I would do well. But things could have certainly been different and I was lucky.

With debt, thinking again about it, the main function it had for me was to tie me down. I have risk taking tendencies and the debt made me careful. The only time since internship that I didn’t have debt was when I sold our house to upgrade. The lack of debt and my bungling a negotiation to buy another house caused me to make one error after another. We had 1.5M in the bank and we could have bought the house we were interested in for cash for 1.35 but I wouldn’t budge and wanted 1.3M. Also at the time, my wife and I had another child. I am not sure if I was going through a mid-life crisis too as I turned around 40 that year. Anyway, after hashing up that negotiation, I refused to look at houses again and I got it into my brain that I would hedge the risk of property going up by a long US-dollar position.

I set aside 300k as risk equity for this and although I had never done a foreign exchange (forex) trade before, it unfortunately went very well and put in place a slippery slope to major financial loss that year. I was suddenly up 800k on the forex position as the USD had a major move that year. A property I bought I found out had done much better than expected and my net wealth increased a lot that year. This resulted in my ego swelling to a size that made it difficult for my wife to tolerate – I became a PITA (pain in the ******************) due to the large size my head had swelled to. I really needed to be relieved of the excess wealth to reduce my head size. I still could not face my initial error or buying a house as I was supposed to because houses in the area were shooting higher. Then I started futures trading and this did have a catastrophic effect on my account.

I managed to average down into a massive S&P500 short position and my account went from positive 1.2M to -800k, thus wiping out most of the equity gains I had ever made. This was painful to face up to, but it made me a tolerable person to live with again. My wife actually commented that she knew the very day that I blew up my account because she knew she could live with me again. Anyway, I was relieved that I would not have to move to a motel. Unfortunately, I also sold a house unnecessarily during this period also for about 800k which would be at least 1.6M now. So in terms of opportunity cost, I lost the same on that as the futures trading. But the futures trading loss was more painful and I learnt first hand about Kahneman’s prospect theory (actual losses are more painful than foregone potential profits).

But most painful was buying the house that I had been avoiding all along. I sat down with my wife and told her “I can’t do it, I have a gut feeling it will go down very soon“. She gave me an ultimatum about stating when I thought this would occur and I said I was most convinced this would happen in the next 6 months. So further 6 months of housing market shooting straight up and then I had to face the day of reckoning and stump up 2.8M for a house I could have bought 3 years earlier before this whole disaster for 1.35M. Worse, I had lost 800k on trading to avoid this and also lost 800k on an investment property I sold during the period because my head wasn’t screwed on properly. Buying that house for 2.8 was the hardest thing I ever did because it crystalized the extent of my mistakes.

So perhaps another narrative is that I needed the debt to keep my head screwed on correctly. My wife said “you need debt, you perform best under debt” and I said “I hate debt, it makes me miserable”. But this was true, I do best when I am tethered down with about 2-3X income in debt. It is not enough to make me too stressed, but enough to stop me from doing anything too stupid.

Another narrative might be that I always had this potential to blow up because I am a risk seeker and combined with 2 particular erroneous beliefs, I was always going to have to take a very large loss to learn my lesson. That lesson was that I can and am often wrong. One of the great things about speculative markets is that they teach you to change your erroneous beliefs. You can get away with having erroneous beliefs in other areas of life (even as a clinician or academic) but trading leverage, you will come to certain truths or die. My erroneous beliefs were that I thought I knew something. And worse I thought I was special and that I could not lose. I think the movie  ‘inception’ is an interesting depiction of how one core belief can lead to a multitude of other layers of beliefs and actions. I could say that a five sigma event occurred in terms of a horrible year, but actually the only five sigma event was my own string of errors based on flawed erroneous beliefs. And my own ego, which really needed to be deflated.

Speculating has been an interesting if somewhat painful path to personal growth.

 

 

 

 

 

Click to expand...

thanks for sharing!

it seems your appetite for risk is significant.  most of us hate debt and can't wait to get out of it.  thanks for ruining the dream. 

it sounds to me like real estate makes up the bulk of your estate.  it is interesting to me that capital gains tax sounds like a lot to you.  for most of us, i believe capital gains is our cheapest tax option after we exhaust tax free space.  i would have thought even more so for you.  how do you handle carrying costs of all these properties while minimizing tax implications?

amazing story anyways, and again thanks for sharing.

 

[Zaphod]

Can you write any off those gains off against your 1.6M in losses?

[Re3iRtH]

Do you regret your decision to join the military.. Or just your throught process regarding the percieved financial benefit? Those two are different.

I am military, and have a 7-figure net worth, and mid 4 figures in passive monthly income from real estate. I am only 1 year out of residency. I just don't see how I would have been better off financially if I went the civilian route?? Most likely i would still have a negative net worth. Even though I'm in a high-paying speciality.

There is something to be said about getting into the investing game earlier.

[Dreamgiver]

ChristopherMD20 wrote:

mitochondria wrote:

Paying 8.5% Front Load on a Fidelity Destiny II fund in the early 90s. Basically, I gave up about $1K on my initial investment in mere minutes.

Paying a whole semester of my sister’s college tuition.  She managed to drop out before the 2 week deadline and had the university cut her a check for the full amount despite the fact I paid for it with my credit card!  She never went to college and I never got my $2,800 back

“Loaning” my father $4,800 for taxes.  Never saw a penny of it back…

Waiting a year to jump into a Roth IRA when it first became available because I didn’t understand it.

Lost an opportunity to contribute to a 457b for 2 straight years because I allowed the “Benefits” department to act like a “Financial Advisor” as opposed to educating myself.

Took out a HELOC to buy a home about 16 years ago.  Repeated the same mistake 2 years later in purchasing a brand new BMW.  All paid off now, but the “opportunity cost” can never be recovered

Potential current blunders in the making-

a) Maximizing a 403b Roth while I am in my prime earning years; the numbers suggest that I probably should be contributing pre-tax. My disdain for dealing with the IRS in the future is probably clouding my logic. I always tell residents, fellows and junior faculty members to NOT do what I am doing when they get in their prime earning years, but rather choose a 403b strategy that is appropriate for their incomes.

b) I’m switching to a Health Savings Account despite having a chronic health condition that will definitely force me to maximize my individual deductible of $2,700.  With a family deductible of $5,400, this may turn out to be a loss in the long run. I have 12 years of compounding $6,900/year, but I’m at high risk of losing this strategy. We’ll see…

These are just the highlights. I’ve made many more.  I will reach Financial Independence in 5-6 years, but I’ll be 59 years old. Thus, I will not fit the category of “Retire Early” in the “FIRE” acronym.

Click to expand…

@mitochondria If you don’t mind sharing, I’d be interested in your insight about dealing with the family situation. I am from a working class family with no formal education and many of my immediate and extended family members are in financial ruins. I am very guilible and I am a softie, but I am also extremely frugal. How do you suggest one deals with family members with their hands out? There are a subset of people I plan to help once I have my own financial house in order (parents, nieces) , but there are plenty of others who may target me.

Click to expand...

I just say I wish I could and that would be no problem but I can't do it because my wife's brother [or insert whatever else] asked us for money and I said no so now I can't say yes to you or my wife will be very upset at me. It works well.

[Dont_know_mind]

Zaphod: Loss is around 700k carried forward capital gains. There is a property we are going to sell next year to buy a commercial property, but this is in my wife's name so unfortunately, we will end up paying CGT on that, despite the capital gains loss in my name. The properties that I could get a CGT for, I really don't want to sell.

The way I look at it, it is annoying to have a capital loss there but I don't want to crystalize any CGT to offset it currently as I still want to keep those assets and my gearing is relatively low still.

[The White Coat Investor]

Re3iRtH wrote:

Do you regret your decision to join the military.. Or just your throught process regarding the percieved financial benefit? Those two are different.

I am military, and have a 7-figure net worth, and mid 4 figures in passive monthly income from real estate. I am only 1 year out of residency. I just don’t see how I would have been better off financially if I went the civilian route?? Most likely i would still have a negative net worth. Even though I’m in a high-paying speciality.

There is something to be said about getting into the investing game earlier.

Click to expand...

Uhhhh.....there's more to this story. Want to fill us in? 1 year out of residency with a million dollar net worth?