I have a confession to make. I recently made one of my worst financial mistakes. As evident of the below, I broke some of my own money rules, and did an incredibly stupid thing at the end of 2007. Well, it wouldn’t have been such a bad move if I hadn’t become so greedy.

My Stock Investing Rules:

1. Don’t think “how much can I make,” but “how much can I lose”
2. Sick to an investment plan and do not deviate from it
3. Don’t let emotions influence investment decisions
4. Invest less than 3% in speculative investments
5. Ignore the day-day movements in the market
6. Don’t get caught up in media hype
7. Don’t try to time the market
8. Have a clear exit strategy
9. Don’t be greedy
10. Don’t lose

These are my rules of investing I firmly believe must be followed in order to be a successful investor. Unfortunately, I made an investment decision that broke almost every rule.

What Did I Do?

Basically, I spent too much time obsessing over the credit/mortgage crisis and how it was impacting the economy and the market. As a result, I got too involved with watching the news, CNBC in particular, and was fascinated with the big up and down swings we have been experiencing in the market. As a result, I fixated on watching my brokerage account balance fluctuate and started to think, “If I just bought on a down day and took profits on the up day. . .”

Then came the hype. The market was mostly going down, but technology stocks were soaring – particularly Google, Apple and Research in Motion. That’s about when I let my emotions get in the way and thought, “why did I pass on Google last year when I said it was too expensive. I would have made a fortune,” which lead to “maybe there is still time to hop in on the trend and make a quick buck.”

This was when Google broke $700 a share and the media was asking how soon it would go to $800. I got very excited and thought about how much money I could make with trading options if Google reached what seemed like the inevitable $800. I threw all my rules out the window and took a gamble.

The next three days Google shot up over $740 a share. My call option had more than doubled in value. I was brilliant and beat those Wall Street fools!

Sadly, I fell prey to greed and hesitated to take profits as I started to think, “what if Google hits $800?” Needless to say, I got what I deserved and watched Google slowly deteriorate from its new highs. I ignored my exit strategy to ride the short-term trend and get out quickly, and let emotions take over my ability to think logically.

To make matters worse, I made subsequent mistakes by not getting out while I still made a profit, still believing it would bounce back. Now I’m sitting on some options contract that has decreased over 90% in value and will expire soon. Now I’m the fool.

While I broke almost all of my rules, there is one important one that I held true to: Invest less than 3% in speculative investing. Unfortunately, that 3% at this point has almost deteriorated to a complete loss, which has a significant impact on my overall performance when the rest of my portfolio is suffering from the current market condition.

What are some of your worst financial mistakes?

Millionaire Money Habit: Having a clear set of investing rules is not enough to be a successful accumulator of wealth. It also requires the discipline to stick to the rules and mental aptitude to not let emotions influence your investment decisions. -RT
photo by bbaunach

Last week, I wrote an article for Blueprint for Financial Prosperity called Playing Good Financial Offense. The flipside to this concept is playing good financial defense.

Improving your personal income statement can be broken down into two fundamental concepts: generate more income and control spending. The first step, however, to creating wealth is to manage your expenses. Without the ability to get a handle on spending, it will be much more difficult to get ahead financially. Think about it. You can continually increase your income, but without having any spending barriers, you will just continually increase your expenses to eat away at your bigger paycheck.

By controlling the money that flows out of your bank account each month, you can keep more of what you earn. This is what Thomas Stanley refers to in The Millionaire Next Door as playing good financial defense.

When you play good financial defense, you have the ability to put the money you save to work for you. In other words, your savings can be used to invest, which will create more money and build wealth. It’s an elementary concept, but the fundamentals of creating riches are pretty simple. Control your spending to keep more of what you earn, and spend your money on things that will make it grow and increase your net worth.

The great thing about playing financial defense is it is easy, especially when compared to increasing your income. In order to increase your income, or play financial offense, it generally involves significant effort and working at something in order to get your expected result. You have to negotiate a raise, get a second job, interview for a better paying job, etc.

To play financial defense, very little effort has to be made because the money is already there. You just have to spend less of it. So in essence, effort is actually conserved since spending money requires you to take an action. Saving money and controlling your expenses also provides immediate results. Trying to increase your income cannot provide this immediate result. By not spending money on going out to dinner five times a week, you immediately save a couple hundred dollars.

Think of it this way. What would be easier?

• Save $100 a week, or $5,200 a year, by not overindulging on unnecessary purchases and trimming expenses
• Increase your income by $6,500, which is what you would need in order to take home an extra $5,200 after taxes

Get control of your financial defense strategy, and you will significantly leverage your ability to create, accumulate and build riches. To get started on your defensive strategy, read Take Control of Your Financial Situation – Part I to create a plan with immediate results.

Millionaire Money Habit: Playing good financial defense is the first step to controlling your personal finances and building a life of wealth. Learn to control of your spending and you can take even greater advantage of the results from playing good financial offense. -RT
photo by dbking

Here is a list of some of the best personal finance articles from my favorite personal finance websites. To kick start your week, spend some time digging through the Millionaire Money Habits archives and the links below to improve your financial literacy and increase your net worth.

Be sure to visit Blueprint for Financial Prosperity, where I was recently a guest author and wrote about the importance of Playing Good Financial Offense to increase your wealth.

Spotlight: Patrick at Cash Money Life gives his advice on where to start when tackling debt. Read Which Debt to Slay First? – Reader Question to learn more.

Investing:

• How to Start an Investment Club at My Dollar Plan
• Pros and Cons of a SEP IRA at Chance Favors

Credit and Debt:

• 0% Balance Transfer Credit Cards: The 10 Commandments of Responsible Borrowing at The Dough Roller
• Seven Deadly Sins That Lead to Debt at fivecentnickel.com

Financial Planning:

• Is Suze Orman Right, Can You Be Your Own Financial Planner? at Moolanomy
• 12 Ways to Make Yourself Recession-Proof at Prime Time Money
• Reflections on Money: 20 Valuable Questions to Ask Yourself at The Simple Dollar
• How My Net Worth Went from $-40,000 to $285,000 in Five Years at Get Rich Slowly

Your Money:

• Why I Think P2P Lending is a Bad Idea at Gather Little By Little
• Being Frugal is Being Different at beingfrugal.net
• How Do American Families Spend Their Money? at My Two Dollars
• Moderation is Key – Too Bad It’s Not Natural For Me at Paid Twice
• No Longer Worried About My Home Value at Single Guy Money

Your Life:

• Looking For a Hot New Job? Find a Headhunter! at the Digerati Life
• Self-Discipline: The Foundation of Productive Living at lifehack.org

Money Carnivals:

• Carnival of Debt Management at Credit Card Lowdown
• Carnival of Personal Finance at Quest for Four Pillars
• Carnival of Money Stories at Quest for Four Pillars
• Money Hacks Carnival at My Dollar Plan

Millionaire Money Habit: To build wealth, you need to perpetually improve your financial literacy. Digest as much information as possible and stick to a plan that works for you. In addition to the articles above, pick up one the recommended books found at the footer of this website, and be sure to subscribe to the RSS feed or by email to be notified of new articles