Many good quotes about common sense have been uttered over the centuries…
“Common sense in an uncommon degree is what the world calls wisdom.” – Samuel Taylor Coleridge
“Common sense is not so common.” – Voltaire
“Common sense is the most widely shared commodity in the world, for every man is convinced that he is well supplied with it.” – Descartes
“Common sense is genius dressed in its working clothes.” – Ralph Waldo Emerson
The financial world is riddled with opportunities for people to violate some basic common sense principles. Let’s explore a couple of them.
Buy Low and Sell High
Pretty obvious, right? I’ve never encountered a single person who disagrees with the wisdom of this common sense investing principle.
And yet, when I examine investing behavior, I constantly see people in violation of it.
Here’s the perfect example. I met with a fellow last month who walked in with about $750,000. Before the 2008 financial crisis, he had close to $1.3 million. But after the crash his account balance dropped by about 40%, he panicked, pulled his money out of the market, and stuck it in a money market account where he’s been making 1% ever since.
Obviously, he sold low. (You might recall that you’re supposed to sell high).
But that’s not the end of it. He walks in my office saying that he’s tired of having his money sitting in cash earning 1% interest and he’d like to get back in the market.
This is the same market where we’ve hit new all-time highs on multiple days in the last two months.
So, he sold low, camped out in cash for 8 years, and now wants to buy high. The exact opposite of what you’re supposed to be doing, on both fronts!
And while it’s easy to scoff at his extreme violation of the “buy low, sell high” principle, it’s not like he’s the only one guilty of this. I see it all the time—maybe not to that extreme, but I see some version of that story at least once a month.
Common sense. Not so common.
Don’t Pay More in Taxes Than You Have To
There are varying levels with which people revile taxes.
At one end of the spectrum, you have people who say things like, “Well, I don’t like paying taxes, but I try to be conscious of the government services that I benefit from and that usually makes me feel better.”
At the other end, you have the people who are ready to secede from the union at the mere mention of the IRS.
But there’s nobody who’s voluntarily signing up to send more money to the government than they’re required to send because they feel that the folks in Washington DC are a beacon of efficiency and virtue and they want to help them fund a few more studies about the effects of cow flatulence on the environment.
Well, I shouldn’t say nobody. There’s probably a dude in Carrboro who can’t get enough of the federal government constantly expanding and wants to contribute every penny he can to that enterprise. But other than that one guy, then “nobody” is probably a safe word to use here.
And yet I frequently see people paying more in taxes than they have to.
Sometimes it’s just laziness when it comes to tax preparation—like taking the standard deduction when you could itemize your deductions and be much better off.
But more often, it’s a problem of tax planning. Most of your tax mistakes aren’t going to be when you’re doing your taxes every spring. It’s the opportunities that you miss now to save yourself some money five years down the road.
So do some planning and don’t pay more than you have to. Unless you’re really into cow flatulence.