Five Dumb Things People Do With Their Money

April 28, 2010 — -- Some days, I get tired of telling people what to do with their money.

You tell them one thing; they do another and then wonder why they have so little.

Maybe it's time for a new approach. Forget about telling them what to do.

Instead, tell people what not to do with their money. Help them avoid the stupid mistakes that can spell financial disaster, and then maybe things like buying a home, saving for retirement and paying for college will be easier.

Toward that end, I've compiled my own list of the worst money moves you can make. The list is by no means exhaustive, as there are an endless number of ways to screw up your financial life.

But avoid these money mistakes, and you'll stand a better chance of achieving your financial goals.

1. Invest in something you don't understand: It's often said that financial products are sold, not bought. That means there's a salesperson behind the transaction, pushing a security or insurance policy that the buyer did not go looking for and does not truly understand.

I'm talking about things like variable annuities, limited partnerships, life settlements or reverse convertibles.

There is a legitimate place for many of these financial products, but quite often their costs are too high and their benefits not as great as presented. Often, the biggest advantage is the commission paid to the broker.

My general rule of thumb is that the less you understand about a financial product, the more it's going to cost you. So unless you understand it, don't buy it.

2. Refuse to sell at a profit for tax reasons: Remember when General Electric fetched $57 a share in 2000 or Home Depot stock approach $70 in 1999? I hope you sold some at the time and paid the capital gains taxes if you held in taxable accounts.

Because you can be sure there were investors who refused to sell simply to avoid paying the IRS. They allowed their investment decisions to be dictated by taxes rather than the investing fundamentals.

The painful consequences of doing this became pronounced during the financial meltdown of 2008 for the owners of bank stocks. For many investors, bank stocks had become legacy investments handed down through the generations. Their values had skyrocketed as banks were bought and sold in a consolidation wave.