April 22, 2022

Learning From Your Financial Mistakes

Eric Bank
Former Citadel Director of Business Analysis

There is no shame in making financial mistakes, but it’s a tragedy not to learn from them. If you measure a lesson’s value in dollars, those you can draw from financial mistakes may be the most valuable. Don’t stew over your missteps – turn them to your advantage by avoiding their repetition.

Let’s examine a few ways to profit from your financial blunders.

1. Understand the Underlying Reasons

You can’t learn the right lesson from your financial mistakes unless you understand the real reasons they occurred. It doesn’t matter whether you were an innocent victim or your own worst enemy – realistic evaluation is the key to avoiding making the same mistake again.

Let’s break it down into two types:

  • You were an innocent victim: Perhaps a hacker stole your identity and then ruined it by running up huge debts under your name. The question is, did you ever consider what to do if you were financially victimized?
    Lesson: Make a list of the ways your money is at risk due to external random events. Then, for each list item, consider the best protection strategy. For example, you might proactively hire a company specializing in undoing the damage caused by identity thefts. In addition, review your exposure to various types of liabilities and consider what kind of insurance is available to cover the monetary damage.
  • You shot yourself in the foot: What part did you play in your financial mishaps? More importantly, what were your assumptions, motivations, and habits? Unwarranted assumptions usually arise from a lack of knowledge and/or unrealistic beliefs. Motivations can backfire, whether good or evil. Bad habits, such as not budgeting, overspending, and sloppy money management, can generate huge problems.
    Lesson: Dig deep into your thinking, where it went wrong, and why you did what you did. Was it greed? Panic? Altruism? Laziness? To avoid repeating a mistake, develop the habit of knowing what you are doing, why you are doing it, and the risks involved.

2. Get Professional Help

We mean financial and emotional help. Financial help is available in many forms, whether through books, courses, professional financial advisors, lawyers, respected stockbrokers, certified accountants, insurance agents, and other reliable partners. Work through your mistakes with your financial helpers to figure out what you did wrong (if anything) and why your money was vulnerable. You hope to identify all the factors that contributed to your mistake and how to prevent a recurrence.

Emotional distress often follows a significant financial loss. Depression, anger, and despair are only useful if you can re-channel your energy into positive action. Don’t be afraid or ashamed to reach out for professional psychological help. 

3. Align Your Risks 

Did you lose money by investing in an overly risky asset? Did you miss out on a significant gain because you were too nervous about losing? A financial advisor can help you understand your risk tolerance and then show you how to invest accordingly. You can achieve a set risk exposure through diversification, asset allocation, and hedging techniques. The ability to invest with knowledge and discipline may result from hard lessons learned, but that ability can serve you well in the years to come.

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