Review of 'Seven Money Mistakes to Avoid'

We came across this article on Yahoo! Finance - Seven Money Mistakes to Avoid. Let's review this article. Our comments are in Red:

1. Saving with the right hand and spending with the left
DIAGNOSIS: Mental accounting
SYMPTOMS: Keeping a savings account that pays 5% interest while paying Visa 15%; thinking a tax refund equals mad money; obsessing over the price of a new car, but failing to monitor the weekly grocery bill.
We agree to this point to some extent. However when it comes to the grocery bill, I think that's stretching the point a bit too much. Most people are penny wise and pound foolish. They will cut coupons, go 15 miles to save 50 cents. However when it comes to the big ticket expenses, they overlook them. We believe in the opposite concept - penny foolish and pound wise.

2. Playing it too safe

DIAGNOSIS: Loss aversion
SYMPTOMS: Quick to sell winning stocks but slow to sell losing ones; putting too much cash in money-market funds and not enough in stocks; reluctance to trade away what you already have, even for something more valuable.
This is one of the biggest mistakes that people make. As we have repeatedly said - everybody needs to invest. But what we have seen is people view investments only from a 'tax-saving' aspect or to buy a house and refuse to explore beyond this. You really need to be investing in different areas than the 2 mentioned above.

3. Looking into a cloudy crystal ball

DIAGNOSIS: Misunderstanding risk
SYMPTOMS: Putting too much of your savings in your company's stock; having very low insurance deductibles; thinking small-cap stocks will rise forever.
Most people don't understand risk at all. This is also a very neglected aspect in everyday life.

4. Living in the moment

DIAGNOSIS: Procrastination
SYMPTOMS: Failing to enroll in a 401(k) plan; not coming up with a monthly budget; waiting until the last minute to make your IRA contribution.
We think that this point is also a bit of an exaggeration. We believe that the monthly budget, etc is too highly focussed by most financial columnists. Remember that a budget has only 1 use - to make sure that you have the requisite amount of money left for investing. What people tend to do is get so focussed on the budget that they fail to concentrate on building their investment skills. The budget becomes a be all and end all which is not the actual purpose of the budget.

5. Throwing good money after bad

DIAGNOSIS: Sunk-cost effect
SYMPTOMS: Hanging on to a lagging mutual fund because you paid an upfront sales charge; making repairs that cost more than your car is worth; making decisions about how to spend time or money based on how much time and money you've already spent.
Yes, we agree with this. This goes in line with the GOLDEN rule of trading - cut your losses short

6. Letting your ego get in the way

DIAGNOSIS: Overconfidence
SYMPTOMS: Frequent trading; concentrating picks among a handful of "surefire winners"; thinking you're an above-average driver.
We disagree with this. You need to be constantly monitoring your investments. At the very outset, you might lag the benchmark indices but over a period of time you will gradually improve and be able to beat the benchmark indices hollow. Remember you can make money when the indices are going down by moving onto the short side. This is again the beef we have with most financial columns. They look at the market as a one-way, up street. Nobody ever mentions abt going on the short side.

7. Following the crowd

DIAGNOSIS: Herding
SYMPTOMS: Buying ethanol stocks because everyone says they're the next big thing; dumping your stock fund after a steep market decline; taking stock tips from family and friends.
We agree on some points and disagree on others. We disagree when the trend has changed, you better follow the crowd and get out of your long positions. The age old saying is very apt here - the markets can remain irrational longer than you can remain solvent. However where we agree is that you need to get back in the market once the trend changes and the markets start moving up. In fact we believe that buys made during this period turn out the most profitable.