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APPLE COMPUTER WAS founded on April 1, 1976, by Steve Jobs and Steve Wozniak. What’s less well known is that originally there was a third co-founder, an engineer named Ronald Wayne. Wayne’s tenure at the company was short, though. Concerned by the risk—and by Jobs’s personality—Wayne sold his stake in the company after just 12 days.
In exchange for his 10% stake, Wayne received $2,300. Today, Apple is worth close to $3 trillion. Wayne’s decision to sell is sometimes cited as one of the worst missteps in financial history.
It’s hard to judge him, though. “Nobody could have anticipated how big Apple would become,” Wayne has said. This, in fact, is the reality with many financial decisions. Seeing Apple today, Wayne’s error seems monumental, but he had no way of knowing what would happen. It’s only with hindsight, nearly 50 years later, that we can deem it a mistake.
Many financial decisions, however, don’t require hindsight. Below are 11 common financial mistakes that are mostly avoidable.
1. Overallocating to illiquid assets. In 2008, Harvard University’s endowment found itself in a bind. On paper, it was worth $37 billion, but it was facing a cash crunch. It had overcommitted to private investment funds and real estate, which offered no liquidity precisely when the university needed it most. This led the endowment to offload some of its assets at fire-sale prices.
While this is an extreme example, the same dynamic can affect individual investors. Like Harvard, it’s easy to ignore the risk of illiquidity when markets are going up, which is why—if you hold non-public investments—it’s important to have a plan for navigating a potential downturn.
2. Overallocating to a single asset. The market today is dominated by the so-called magnificent seven tech stocks. If you own one of these, that’s great. But it can also pose a risk—because it may now represent an overly large percentage of your portfolio.
The simple solution is to sell the stock—or part of it—and diversify. But you might worry about the tax impact. It’s also natural not to want to walk away from an investment that’s done so well. This is called recency bias. A good solution: Don’t view selling as a binary decision. Instead, try to whittle down big positions over time.
3. Choosing interesting investments. As I noted recently, there are thousands of investment options out there. If you have a sizable portfolio, that can make it difficult to stick with a simple set of investments. It’s natural to want to explore more interesting terrain. According to the data, though, “interesting” investments tend to be less profitable than their more boring peers.
4. Not carrying umbrella coverage. For many people, insurance is a tedious topic, which is why they tend to put this part of their financial life on autopilot. But it’s worth reviewing your coverage each year. Confirm, in particular, that you carry umbrella insurance on top of your home or auto policy. Because it’s designed to protect against unlikely events, umbrella policies tend to be inexpensive.
5. Paying too little tax. This might sound counterintuitive, but when you arrive in retirement, it’s important to be intentional about your tax bill. Sometimes, in the first years after retiring, folks are so excited to be in a low tax bracket that they overlook a key opportunity. Taxable income tends to increase again—sometimes sharply—after age 70, thanks to Social Security benefits and required minimum distributions from retirement accounts. It can be a mistake not to draw some money out of tax-deferred accounts during those earlier, lower-tax years.
6. Using cash for charitable gifts. Do you have stocks or other investments with unrealized gains in your taxable account? If so, don’t overlook the value of a donor-advised fund (DAF) for charitable giving. When you move appreciated shares into a DAF, they can be sold tax-free, making the entire proceeds available for charitable gifts. That’s why it’s almost always better to give this way, rather than with cash.
7. Acting on market forecasts. Do I follow market news and commentary? Absolutely. But do I use it to inform investment decisions? Rarely. How to explain this seeming inconsistency? The reality is that most market events are short term in nature, but most people’s financial plans are built around the long term. That’s why you wouldn’t want to put too much stock in the advice of market commentators.
8. Acting on anecdotes. Why do we enjoy watching movies or reading books? Because stories are compelling. But when it comes to investments, this can pose a risk. It’s fairly easy to tell a convincing-sounding story about most any company. The trouble, though, is that stocks are driven by a mix of news, data and investor opinion—and it’s hard to know how these factors will combine to impact share prices. That’s why it’s a mistake to put too much weight on any given anecdote.
9. Acting in response to recent events. The value of a company’s stock should, more or less, equal the sum of its estimated future profits—this year, next year and every year into the future—so you shouldn’t put too much weight on recent events. Suppose an auto company is contending with a costly recall. Yes, that matters, but probably only to near-term profits. If a company will still be in business 20, 30 or 50 years from now, a dent in one year’s profits should have only a small impact on the stock’s overall value.
10. Acting in response to political events. It’s an election year, and that always gets investors wondering—and worried—about the impact of political events on markets. The fact is, though, that markets have risen under both parties. Indeed, the best market results have been during periods when the White House and Congress were controlled by different parties. The upshot: Investors shouldn’t let their happiness or unhappiness about election results color their financial decisions.
11. Paying too much for college—as a parent. The right college education can deliver a positive return on investment. But it’s important for parents to recognize that this benefit accrues to the child, not the parent. While we all want to help our children, it’s also important to check the numbers. It’s okay for children to take on some debt if the alternative is for their parents’ finances to be stretched too thin.
Ronald Wayne is philosophical about his experience with Apple. “Should I make myself sick over the whole thing?” he asks. “I didn’t want to waste my tomorrows bemoaning my yesterdays. Does this mean I’m unemotional and don’t feel the pain? Of course not. But I handle it by going on to the next thing. That’s all any of us can do.”
To be sure, no one gets every decision right. But that makes it all the more important to avoid missteps wherever possible.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X (Twitter) @AdamMGrossman and check out his earlier articles.
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Any advice on how much umbrella coverage one should have? Some percentage of portfolio value or some such?
I’ve been told that the most important thing is to have the insurance company’s lawyers in your corner, fighting on your behalf. A $1 million policy should get you that.
Thanks. Would that hold true even if one had say an 8 million portfolio?
As I understand it, even if you had an $8 million policy, that doesn’t mean your $8 million is protected. Suffer a $16 million judgment, and both your $8 million and the insurance company’s $8 million would be gone. That said, from what I gather, most plaintiff’s attorneys will settle for whatever they can squeeze out of the insurance company unless you’re obviously wealthy. This whole areas is shrouded in mystery — at least to outsiders — because stats aren’t available. The reason: Most times, these things are settled and never end up in court.
Thanks for the reply. I asked a lawyer once about if a claimant could know about wealth level, and he said if it got as far as discovery they’d know everything about it. I know nothing about legal matters, but perhaps stealth wealth might give a level of “security by obscurity” at least in some cases.
– “Concerned by the risk—and by Jobs’s personality—Wayne sold his stake in the company after just 12 days.”
“and Jobs personality”? Come on man. What is the source for this? The real Jobs and the Jobs of lore are very different. Wayne never said anything about Jobs’ personality as a cause for him to sell. Jobs and Woz were ambitious kids with little to lose, and had a very, very different risk tolerance than Wayne.
Jobs had taken out a $15,000 loan so he could buy supplies to fulfill Apple’s first contract with The Byte Shop for 100 computers. But they were notorious for failing to pay their bills and Wayne was afraid they wouldn’t be able to recoup the money. Jobs and Wozniak were young and broke, whereas Wayne had assets including a house, and feared that the financial burden would fall on him if the deal went bad. Startups are high risk.
Wayne said he felt out of place. Like he was “standing in the shadow of intellectual giants.” … “I was 40 and these kids were in their 20s. They were whirlwinds — it was like having a tiger by the tail. If I had stayed with Apple I probably would have wound up the richest man in the cemetery.”
https://www.cnbc.com/2018/08/02/why-ronald-wayne-sold-his-10-percent-stake-in-apple-for-800-dollars.html
As you point out, Wayne had assets at risk, since Apple originally formed as a partnership. When shortly later Apple incorporated, Jobs asked Wayne to return but he was not interested. I’ve never heard that Wayne had an issue with Job’s personality.
I agree with all of your ideas except some parts of number 11. You certainly should not let your kids amass massive debt unless (maybe) their expected income in law or finance will service it. There is no data that I know of however that shows more expensive colleges guarantee acceptance to graduate schools like that. Most of the richest doctors CEOs went to cheaper schools, but going to an expensive Ivy does increase your chances of acceptance, with similar grades etc.
On the other hand if your kid is determined to major in poetry an Ivy League degree will get her foot in doors closed to the average college graduate. This is not worth massive debt, but if you can afford it, it is a wise choice. Future poets are better off following their dreams than being forced to major in economics!
The bottom line is that if your child has to major in poetry or film they need a plan to earn a living.
We had a “fake” dog-bite claim a few years ago. In Florida, every personal injury attorney in town has a billboard claiming you can get rich by suing someone. Turns out our homeowner’s policy did NOT cover dog bites! Fortunately, our umbrella policy did. Eventually the case was dropped (it was a total scam) and the guy did not collect. We have jacked up our coverage to a few million based on advice of our attorney–cheapest coverage you can ever buy. And it gets progressively cheaper as you add more coverage, but you do have to show the insurance company your net worth to qualify for the coverage, fyi.
Perhaps Wayne knew that money should buy happiness, that Jobs was a colossal ass in the 1970s, and that no money — even 10% of trillions — is worth ruining each day working with that.
“It’s okay for children to take on some debt if the alternative is for their parents’ finances to be stretched too thin.”
Enjoy your articles Adam but I am not sure about this comment in item #11. In 2023, the average federal student loan debt was $37,388 and private student loan debt was $54,921 per https://www.usatoday.com/money/blueprint/student-loans/average-student-loan-debt-statistics/.
I think we can all agree that loaning money to 18 year old high school graduates has not worked out too well except for the financial institutions. If the parents are unable to help pay for college there are alternatives to student loans. Part-time jobs in high school and while in college. Scholarships. Low cost community colleges. Enlisting in the military.
I would recommend watching this documentary about the student loan crisis: https://www.youtube.com/watch?v=W7krdoXswQA.
The fact that there is a student loan crisis doesn’t mean that student loans aren’t cost beneficial for many students. Most of the students at the college where I taught worked at least 20 hrs/wk and had student loans. Many had also spent their first year or two at a community college to help keep their student loans manageable.
Great list.