Financial Horror Stories

By Chris Duderstadt

October 18, 2021

Financial Horror Stories

Key Points – Financial Horror Stories

  • Seeing through the Spookiness: Being Aware of Financial Horror Stories
  • What Is Your Biggest Financial Mistake?
  • Financial Horror Stories Often Derive from Unrealistic Expectations
  • 12 minute read | 32 minute watch

Seeing through the Spookiness: Being Aware of Financial Horror Stories

Halloween is a fitting holiday to describe the financial world. Everyone loves a good treat when the markets are doing well, but there are also several tricks that people need to be aware of. While venturing through a haunted house might be fun, being haunted by one of your financial decisions is a different story.

As the spookiness builds with Halloween on the horizon, Wayne Robinson, CRPC®, AIF® recently joined CEO and founder Dean Barber to give their thoughts on some financial horror stories. We hope these will help educate you so that you don’t add your name to the list of these financial horror stories.

GameStop Saga Generates Gambler’s Mentality

For our first financial horror story, we revisit the GameStop Saga from last winter. A 23-year-old woman on Reddit who got into investing during the GameStop Saga shared that she has been losing money nonstop ever since from stupid plays.

It’s to the point where she has acknowledged that she’s essentially been gambling. Her total losses are over $12,000, which she couldn’t afford to lose. In a two-day period, she lost $5,100 because she couldn’t think straight. She kept pumping more and more despite her continuous losses.

Fear and Greed

While she avoided several expenses by living with her parents, her overzealous investing still cost her all the money she had from her paycheck and other profits. She even sold some of her stuff to fund this spree. This was something that she never envisioned, but she puts the blame 100% on herself for her financial recklessness.

“This first thing that comes to my mind with this gal are the two strongest emotions when it comes to investing: fear and greed. This is a story of pure greed,” Dean said. “It reminds me of the mania of the Dot-Com Bubble in the late-1990s. The idea that the stock market is a place to make fast money really shouldn’t be that way.”

The GameStop saga and emergence of crypto currency are just a couple of the latest examples of situations where people don’t fully understand what they’re doing, as they’re more concerned about making money as quickly as possible. The gamble did pay off in a big way for the people who invested in GameStop before everything went downhill. The GameStop saga reminds Wayne that timing is everything.

“There’s all this chatter on social media that fueled the hype,” Wayne said. “That’s the world that we live in. Social media is a huge influence. There’s no denying that. She was clearly on the wrong side of that trade. Unfortunately, she bought into fear and greed. The reality is, though, that there were people that made a lot of money.”

The Smart Money and the Dumb Money

The people who made a lot of money were in what Dean likes to call the smart money. What’s his reasoning behind that, you ask? The smart money hypes up the stock and its position after it’s already had its run-up—making everyone else feel like they’ve missed out. As those people rush to the party with the stock still running up, they soon realize that all the hype is because the people with the smart money are wanting to sell. Suddenly, the smart money becomes dumb money.

“For somebody to sell, you need to have someone else willing to buy,” Barber said. “One good rule of thumb is that when things start looking like they’re too good to be true, the good stuff is already gone. You’ve got the people out there that are the greedy people now who are saying they’re done, realizing they need to get out of this, and trying to figure out who they can convince to buy it.”

A Spooky Segway

Sadly, Dean has seen far too many people fall victim to the greed that can creep into the investing scene. The 23-year-old woman who came out on the wrong end of the GameStop saga reminded Barber of one of his clients who had retired young after getting a buyout. The client was a manager of a large telecommunications company, and had a nice, diversified portfolio in the late 1990s.

Things were looking great in 1998 and 1999 when tech stocks were returning at more than 100%. However, there was limited exposure to tech stocks at that time due to the speculation surrounding the Dot-Com Bubble. The client became impatient and started calling a brokerage firm and trading behind Barber’s back.

“On January 1, 2000, I called him and told him he’d been lucky, but needed to stop,” Dean said. “I told him that he was 99% technology and telecommunications stocks at that time. We needed to get that portfolio back to the right diversification. He said he had it figured out and not to worry about it. On January 1, 2000, he had just over $1 million. By the end of 2002, he was down to $200,000. He had to go back to work. It’s the same story.”

What Is Your Biggest Financial Mistake?

Losing $800,000 in such a short timeframe will have a detrimental fallout for most, and it often goes beyond personal finances. Many financial horror stories find a way to involve one’s family as well. The next financial horror stories that Wayne and Dean discussed centered around Reddit users answering the question, “What is your biggest financial mistake?” Family was certainly at the center of the first one they reviewed.

A Costa Rican Catastrophe

Healthcare costs and financial horror can often go hand in hand, and it certainly did for this Reddit user and his family. With his father’s health deteriorating and his then-wife being fed up about the high healthcare costs in the United States, he was in a serious bind. Rather than using any kind of government assistance, she recommended that his parents and their family move to Costa Rica and move his father into a nursing home there.

So, they rented out his parents’ house in Tennessee, and settled in the Gold Coast. However, life was anything but golden. Six months later, his father was diagnosed with dementia. His diminishing mental capacity and not speaking Spanish to communicate with many of the healthcare workers made for an excruciating combo. Ten months and $30,000 later, they decided to move back.

The root of his problem is that his parents had never been responsible with their money. Unfortunately, it clearly got to the point where he ended up suffering some of the consequences.

“This financial horror story is unfortunately more common than not. I’m not referring to the Costa Rica part, but the part where you get to that point in life where you can’t take care of yourself,” Dean said. “Then, you need to rely on your family to take care of you or you need in-home nursing care or in a nursing home. Not having the proceeds compounds the problem.”

A Great Lack of Education

Medicaid is designed to prevent children from being destitute from having to pay their parents’ bills. While Medicaid and Medicare are a part of our social system, Dean sees far too many people who don’t fully understand the rules behind either of them. I

“There’s a great lack of education,” Barber said. “The reality is that everyone is going to die, and we don’t know when. The other reality is that there are more people that will spend some time needing long-term care than won’t. Yet, none of us think it’s going to happen to us. If you don’t plan for it by building it into the plan and saying, ‘What if?’ and figuring out how you can reduce the risk if it happens to you, it’s irresponsible.”

Dean and Wayne both understand that building your career and family can be stressful enough and that thinking long term about health and insurance can be easier said than done. However, it needs to be done so that more stress isn’t added to the table.

“When they do think about insurance, the cost is exorbitant because their health might not be where it needs to be,” Wayne said. “They’ve waited too long and are in a much higher age category where they’ve potentially priced themselves out of it with the premiums in a lot of cases. It’s important to get planning done sooner rather than later even though it’s uncomfortable.”

Family Matters

This financial horror story is one that hits Dean on an even more personal level. When he was a child, the sister of his grandmother on his mother’s side of the family had dementia. Dean observed at a young age how she couldn’t take care of herself and didn’t know who anyone was. It got to the point where she had to be put in a nursing home.

Dean’s mother promised his grandmother that she wouldn’t let history repeat itself if she developed dementia as well. Unfortunately, she did develop dementia, so Dean’s mother moved her parents into her house. Dean’s mother cared for her for three years up until his grandmother became violent and needed to be put in a nursing home.

“It was the hardest thing,” Barber said. “That took more years off my mother’s life because the caregiver is the one that really suffers. That’s what people really need to realize. That’s why I say it’s selfish. The caregiver is the one that’s going to suffer that most because the person that’s in that position doesn’t even know who they are, where they are, or what time of day it is.”

Expect the Unexpected

Wayne is also well aware of the importance of a sound financial plan to accommodate for long-term family healthcare costs. His father-in-law developed dementia. It was never in his nature to be violent, but when he did, his mother could no longer care for him.

“I think what people can learn from this is that you always need to plan for the unexpected,” Dean said. “Always ask the question of what could possibly go wrong. The great thing about it is that we’ve seen these things play out so many times so we can counsel people about the possibilities, stress test their plan against those things, and make sure that scenario never plays out in their family.”

Wayne has also realized that there is a peace of mind that a lot of people get going through assessing if they can self-insure such a risk.

“Just knowing that is so important,” Wayne said. “You can sometimes see a sense of relief in a client’s face when they know that because it’s a big concern for a lot of people. In some cases, people don’t take that risk seriously enough.”

Don’t Try to Time the Market

Wayne and Dean have a lot of respect for the people who do take those risks seriously. It’s the people who ignore them completely that are often the subjects of these financial horror stories. That was the case for another Reddit user who turned his who portfolio into cash in December 2007. He thought he could time the market.

He sat on his cash for a few months as the market mostly went sideways. While he was sure the market would tank, it didn’t. So, he bought back in in May, and was still in when September hit. He felt like he was close to being a genius, but not quite. The Great Recession had other ideas.

“Here’s another story of fear and greed,” Dean said. “If he bought in in September 2008, this guy got smoked. Most of the pain that came in The Great Recession was during the fourth quarter of 2008 and first quarter of 2009. You could have looked at the market from January 2008 through the July-August timeframe, and it was pretty much flat.”

A Game of Patience

While there was some volatility in the first two-and-a-half quarters of 2008, it wasn’t devastating until Lehman Brothers collapsed and there started to be trouble with AIG and General Motors. Dean believes that if that person would’ve stayed in cash for another six to eight months, he would’ve had some real buying opportunities.

“It’s one of those things where investing is a game of patience. It’s a long-term approach,” Barber said. “Once again, we have a scenario where people think investing is all about getting rich quick. If you look back at some of the most successful investors over time, the clients we serve, and the millionaire next door, they didn’t play those games. They knew that having diversification, a consistent savings method, having patience through good and bad times, and understanding what you own were all key.”

A Hypothetical Scenario

A key component to the game of patience is asking yourself questions throughout the investment cycle. To drive home this point, Drive gave a hypothetical scenario that involved having $140 a share in Procter & Gamble stock. If the stock market crashed and it went down to $100 a share, these are a few of the questions Dean would ask himself if he held that stock.

  • Is Procter & Gamble selling that much less goods?
  • Did their profits drop by that much?
  • Is the company worth that much less than it was before or is this a temporary phenomenon?
  • Is it possible that Procter & Gamble goes to zero?
  • Are they over-leveraged?
  • What is going on within that organization?

“If you understand what you own, you can look at it and say that it’s not a big deal at all,” Dean concluded.

Investing in Stocks Is Like Watching Paint Dry

Patience is a pivotal virtue with investing, but it’s not an easy one to follow. When retirees use their investments to fund their retirement, Wayne wants them to remember a quote from Paul Samuelson.

“Investing in stocks is like watching paint dry.”

“The planning aspect focuses on how we keep people calm. Investing is a mental game,” Wayne said. “People can make irrational decisions. It’s planning around different bucket strategies in some instances where we have the short-term, intermediate, and long-term money. The growth aspect of the money that might be taking more risk and is subject to the volatility isn’t even in play for years to come.”

And remember, volatility is nothing to be fear if the planning is right. Volatility is normal, expected, healthy, and can create buying opportunities.

A Crypto Market Master … Or So He Thought

As mentioned earlier, one of the latest popular buying opportunities has been in crypto currency. Our next financial horror story features Dave from Oakland, who explained his crypto roller coaster on Reddit.

After turning $2,000 into just more than $10,000, Dave thought he was a crypto market master. He had a lot to celebrate, but one mistake proved to be very costly. Dave made a leverage call on Ethereum at $4,000, expecting it to go to $4,300. He was going to cash in again, but forgot to set a stop-loss price.

Dave spent the next week trying to save what he could and recover from his losses. In a flash, it liquidated and he had nothing. While the sudden financial free fall was painful, Dave realizes he has no one to blame but himself. He is doing his best to rebuild and learn from his mistake.

While Dave and many others are still learning about the crypto currency market, Dean highlighted that his mistake of buying on leverage is nothing new. It led to The Great Depression and The Great Recession.

“People don’t understand the danger. You could literally buy on margin before the 1929 stock market crash, and you could margin everything,” Dean said. “When people said they lost the shirt on their backs, they didn’t just lose what they had. They lost more than what they had because they borrowed money to invest.”

The Moment Dean Knew the Housing Mania Bubble Was Over

Dean vividly remembers one Sunday morning in the fall of 2017 when noticed that buying on leverage was about to become a huge problem. When Dean picked up the newspaper that morning, he saw a full-page ad on the front page of the money section. With the purchase of a Pulte home, you could get a BMW. Dean closed the newspaper, turned to his wife, Kim, and told her that the housing mania bubble was very close to being over.

“There were also those crazy ads that you would hear at least five times if you were driving for 30 minutes,” Dean said. “For example, ‘If you own a home have at least 2% equity in your home, we’ll give you up to 120% value of your home. You can use that money to buy a new car or do home improvement.’ They also had what I call liar loans that were stupid that didn’t verify income and assets.”

At the time, people could put no money down on a home and do an interest-only, five-year balloon note. People were paying for more expensive homes than they could ever afford because all they were paying was the interest.

“They were thinking, ‘Look how fast home prices were going up. In five years, I’ll refinance this thing and I’ll have all this equity in the house,’” Barber said. “Or they could flip it, buy another one, and make some money on the deal. If you have 10% equity in your house, if the house value drops by 10%, you just lost 100% of your equity. If the house value drops by 20%, you just lost 100% of your equity, plus another $100,000 if you owned a $1 million home. You lost $100,000 more than what you had.”

FOMO Is Real

Whether it was leading up to The Great Recession or even in recent years with crypto currency, volatility has been generated due to people leveraging themselves beyond belief. Wayne reiterates that going in blinding to those situations isn’t the right approach. It’s imperative to have a good understanding of the situation and not be sucked by the fear of missing out. You might have heard this called FOMO for short.

“People are blindly buying in. They don’t understand what they’re buying, what the project is, what they’re trying to solve for, who the team is, what the financial backing—all of that,” Wayne said. “But, there’s something in it. People need to do their own research and figure out how they can connect with a professional that can help them understand these things.”

Financial Horror Stories Often Derive from Unrealistic Expectations

For Dean, each financial horror story seems to circle back to his point about fear, greed, and people simply wanting to get rich quick. The last example Dean gave involved someone saying they were going to start their own business. Many of those people think it will be easy and that they’ll make a lot of money. Those assumptions often lead to failure before the business even starts.

“Those people fail because most people go into it with an unrealistic expectation of what it’s going to look like,” Dean said. “They think it’s going to be simple. They don’t understand the risks and the massive amount of hours they’ll have to put in.”

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.