Financial Risk Pitfalls

 There are many mistakes and pitfalls that we can learn from by looking at the past.  Many of the money blunders that people commonly make can help us make better decisions in the future.  After looking at some of the common situations people get themselves into, we can hopefully notice them in our own life and avoid them.  Some people who have already made these mistakes will also testify as to their own situations.

False Assumptions 
Many of us tend to make plans based on the assumption that things are always going to work out to be the best for us.  We tend to forget to make plans for when things don't work out well for us.  "It's these poor assumptions that are a big reason people lose money in the stock and housing markets." according to Marina Krakovsky, author of "The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit."  Many of the people taking these risks are "blithely assuming that what's going up is going to continue going up," Krakovsky says.  "Put another way, if you don't even see that you're in the midst of a bubble, then putting your money in there seems like a smart investment, not a gamble at all."

Rushing Decisions
Another prime reason people make money mistakes is rushing decisions.  David Rossett, a wealth management advisor with Northwestern Mutual in New York City has a client who bought an expensive home.  For starters, "the house was a financial stretch", Rossett says.  If that wasn't bad enough, before the client acclimated to his new budget, he decided to renovate almost immediately.  "What started as a small project quickly grew.  Now they are very stressed.", Rossett says of the client and his spouse.  Fortunately, this client owns his own business.  The hope is that he increases his income in the coming months to cover the added expenses.  If that doesn't happen, he'll have to borrow from his in-laws, which he obviously doesn't want to do.

Skewed Perspective
This is the case of when people don't look at the big picture because they're blinded by their excitement over what they're about to do.  This could partly do to the case that they don't have all the information they need to make a smart decision.  ReKeithen Miller, an Atlanta-based certified portfolio manager with Palisades Hudson Financial Group says he sees this a lot.  "People are quick to share their successes when risks pay off but rarely share when things go terribly wrong, which can give people a false impression of the results of risk-taking," says Miller.  He also says people can get a skewed perspective from Facebook.  You see all the exotic vacations people are taking and you don't see the extra hours they are working or that they are actually up to their eyeballs in debt.

Using Your Heart Not Your Head
This may be the most common reason people make mistakes, Rossett says.  "Why do people make bad decisions?...Sometimes it's being cheap, sometimes it's greed, sometimes it's denial about their own mortality and sometimes it's just being stupid."Rossett says, adding that "typically, people make decisions emotionally instead of logically."  The best defense against making a major money mistake, he says, is educating yourself.  And if you have made some major financial blunders, Krakovsky is empathetic.  "Misunderstanding risk is part of human nature," she says.  "People shouldn't feel bad about being 'stupid' with risk."

References:
1. Williams, G. (2015, November 3). Why Do Some People Take Stupid Risks With Money? Retrieved December 7, 2015, from http://money.usnews.com/money/personal-finance/articles/2015/11/03/why-do-some-people-take-stupid-risks-with-money?page=2

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