"Stupid tax" is Dave's term for the money you lose when you learn a tough financial lesson—like interest on credit card debt. But bad judgment in your investments can lead to stupid tax as well.
Here are two real-life lessons these folks learned the hard way.
Richard Bell had been investing in his Roth IRA for several years when the stock market began to slide in early 2008. By November, Richard's investments had lost half their value. Richard began to panic, so he told his investing advisor to cash out all his investments. His advisor told him it was a bad move, but Richard said he couldn't watch his investments fall any further. He was getting out and staying out.
Lesson learned: Lots of people panicked when the S&P 500 dropped 800 points in a slide that lasted more than a year. Many, like Richard, pulled their money out of their investments, but that only made their losses permanent. Richard should have listened to his advisor, held on to his investments, and continued making contributions to his retirement plan. Studies show investors who had retirement accounts at the end of 2000 and continued to invest through the end of 2010 saw their balances triple—even during one of the worst markets in history!
TD was invited to invest with a day trader through an investment club. He consulted an investment broker friend who told TD it was a bad idea. But TD was hooked. He ignored professional advice and invested with the club anyway. Two years later, that day trader has disappeared along with TD's money and $28 million from three investment clubs.
Lesson learned: Don't fall for the promise of quick money. To build wealth, invest for the long haul and work with an advisor who will help you choose mutual funds with good returns. Your advisor should have the heart of a teacher who will answer your questions and help you make your own investment decisions.
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