How do you quantify the value of avoiding a mistake?
Back in 2007, the real estate market was booming, especially here in Florida.
At those times, investors weren’t buying just one or two properties—they were buying six or seven. The property market was red hot, and buyers believed it would go on forever. Real estate prices looked like they’d never stop going up.
A friend was actively buying properties back then, and after a series of conversations, I suggested that perhaps they should consider selling a couple of their units at a nice profit and using the money to pay off the high debt on the others. They had recently bought several beachfront condos, and while the values were rising quite rapidly, their overall net worth was becoming very leveraged and concentrated in one asset class.
Their response was one that I will never forget. They said if they sold, they would “never be able to buy back in again.” Or in other words, they were absolutely convinced that prices were on an upward trajectory, with no end in sight.
I’ll never forget that because, in hindsight, that opinion foreshadowed a looming real estate crash that would rock the world to its core. As long as investors believed prices would continue going up, they would be willing to pay anything to get their hands on a piece of property. That view, combined with very loose lending practices from banks and mortgage companies, led to a major bubble in real estate prices. It was a recipe for disaster – the fear of missing out along with the certainty of always being able to sell at a higher value, with zero concern about prices going down all enabled by “free” money from lenders.
Around that time, I talked another friend out of buying a property. Of course, I didn’t have a crystal ball, but this property was so expensive relative to their assets, there was no way that it made sense. They couldn’t cover the mortgage payments and other expenses of ownership, unless they rented the property at a very high rental rate, making it a highly speculative investment. The numbers didn’t work so it was not a good investment and certainly not a good fit for them.
By following my advice and passing on the property, they avoided what could have been a devastating financial decision. They could have lost tens of thousands of dollars or more as the real estate market soon thereafter crumbled and asset prices plummeted.
So, how do you quantify the value of advice if it helps you avoid making a mistake?
As a financial advisor with over three and a half decades of experience helping clients avoid financial mistakes, this is a question I think about often. How do you quantify the value of advice if it helps you avoid making a mistake?
It’s difficult to quantify because you can’t prove a counterfactual—in other words, we can only hypothesize what the outcome would have been if we’d made the mistake that the advice helped us avoid. In addition, often, the real value of avoiding a mistake is hidden below the surface. That’s because mistakes don’t just cost us money. They can cost us time, peace of mind, confidence, and relationships.
In the end, the true value of advice is hard to quantify, but there’s no doubt that it pays to avoid financial mistakes.
So how can you avoid financial mistakes? Let’s explore 4 simple tips to help you do just that.
4 Simple Tips to Help You Avoid Financial Mistakes
- Understand what’s important to you. One of the most important things you can do to avoid financial mistakes is defining and understanding what’s important to you about money. For example, if you’re presented with an exciting but risky investment opportunity and unsure whether to go with it or not, take a step back, and see how it aligns with your core values. If your main focus with money is providing a sense of security for you and your family, then this exciting but risky investment opportunity likely won’t be a good fit.
- Have a written plan. The road to financial freedom can be bumpy and isn’t complete without a few unexpected twists and turns. That’s why it’s crucial to have a written financial plan outlining step-by-step how you plan to reach financial freedom. That way, when things get out of alignment and you’ve got decisions to make, you can reference your written plan and find the answer you need right when it matters most.
- Lean on trusted advisors. While a written plan is essential, a trusted advisor can be your saving grace. That’s because money can be messy, and sometimes it takes the listening ear of a trusted advisor to help you sort out your best next move. In addition, a trusted financial advisor is there to understand your unique situation and come up with tailored financial recommendations to fit your goals and dreams. Be sure to work with a CERTIFIED FINANCIAL PLANNER™ practitioner to ensure your advisor is legitimate and skilled in multiple financial planning disciplines.
- Check your emotions. Last but not least, do your best to keep your emotions in check to avoid financial mistakes. One of the biggest mistakes I see as an advisor is investors letting fear get the best of them, causing them to panic-sell their portfolio during a market downturn, forcing them to lock in steep losses. Once you’ve outlined a clear plan and are working with a trusted advisor, remind yourself that you are on the right track and your emotions are the only thing left to derail you.
One of my favorite money quotes of all time comes from the Oracle of Ohama, Warren Buffet. It reads: “If you cannot control your emotions, you cannot control your money.” Of course, everyone has a different approach to controlling their emotions. Just be sure that you have a plan and know the impact your emotions can have on your money to help avoid financial mistakes.
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