The experience you gain from bad financial decisions can be invaluable
My 7-year-old son learned a financial lesson at New Year. He left his wallet in the shoe holder at a McDonald's playground. Lo and behold, when he finished playing, the wallet was gone.
The money it contained was a combination of Christmas presents and profit from selling home-grown plums and courgettes on the side of the road.
He had already calculated how he would spend the money to enrich his lifestyle. But the cherished cash was gone in one fell swoop and his world fell apart.
It was heart-wrenching as an adult to watch him cry for nearly an hour - and then to have to return twice in two days to ask if it had been handed in. I could have "saved" him by replacing the money.
The urge had to be resisted or he wouldn't learn the lesson of not looking after your money. We reflected a lot on what happened and how adults look after their wallets and cash. With a bit of luck the experience will be of long-lasting benefit to him.
Financial lessons can be learned at any age and there will be thousands of Kiwis reflecting this month on their financial mistakes of 2009.
I know that I learn lessons every year. Last year for me it was to act faster on my convictions. I was drip-feeding money into the equity markets from the previous October, but got waylaid with life in March even though I was marvelling at the bargains. I missed out on some quite spectacular gains.
For other equity investors that early part of the year was much worse. Almost every financial planning firm has clients who panicked and bailed around March last year, says Jeff Matthews, senior financial adviser at Spicers Wealth Management, and sold at the bottom.
The lessons, for those who are willing to admit their mistakes, was not accepting falls as a natural part of the stock market lifecycle.
People don't always learn good lessons from their mistakes, says author Martin Hawes, whose latest book, Letters to Aston: Lessons learned from a lifetime of investing, contains a section on financial mistakes he has made.
In the 1987 stock market crash and its aftermath, Hawes lost "a great deal of money". He had been borrowing to invest, which amplified the losses.
The good lesson Hawes took from this experience was not to invest in bubbles, to invest in companies that made real money and to accept that bad things happen.
Other investors took the wrong messages out of that crash. By and large that was that equities are bad, said Hawes. These people often went on to even riskier investments such as finance company debentures, and were burned again.
A few even lost money in the collapses of Blue Chip, Merlot and other property "investment" companies. Many think property investment is also inherently bad because they invested with their eyes closed.
On the surface it seems hard to imagine that this group could learn a lesson now that would stand them in good financial stead in the future. However, says Matthews, a useful one would be the importance of financial literacy.
If they took that on board, they'd know the NZX, for example, is a very different place now from the exchange of 1987. There is a much lower chance, thanks to continuous disclosure and other measures, of investing in vapourware companies such as the ones Hawes lost money in: Chase, Ariadne, Robert Jones Investments and others.
My first financial lesson from a mistake that I remember started in the lead-up to 1987 when I was investing my bursary and money from part-time university jobs into the stock market - belief that my investments could only continue to go up in value. I lost a relatively small amount of money but learned big lessons.
When between 1997 and 2000 I was attending press conferences for UK-based technology companies, and financial adviser conferences, my eyebrows were raised at the number of people talking about new paradigms.
Like Hawes I thought "bubble". I recall images of ageing financial advisers who probably didn't even use the internet then being wooed by the fast-talking marketing people for technology funds.
Lessons don't just exist in the equity markets, although they've been pretty clear cut in the past 18 months. We've either just been through a property bubble or are in the midst of one, which has already ended in mortgagee sales for many investors.
The fallout isn't over, says economist Rodney Dickens, of Strategic Risk Analysis, which prepares reports on the housing market. His latest analysis published this week concludes that real house and section prices are a long way off being out of the woods.
Unfortunately, says property author Graeme Fowler, many property investors are jumping back in without learning the lessons. Fowler has seen a number of erstwhile successful investors come unstuck over the past year when they either lost jobs or their cashflow because they were between tenants and didn't have a financial backstop.
Their modus operandi has been to borrow 80 per cent on interest-only and to revalue and rebuy each time property values rise, leaving them little equity in the overall portfolio.
The property bubble may not be over. And if you read the world's financial media there are bubbles building that will see some fall for the old "new paradigm" line. They include:
* China
* Commodities and
* Gold
Investor and public speaker Mike Handcock said he learned in 2009 to pay more attention to governance in a recession and also to make passive investments active.
Handcock, one of six investors who own boutique Bali resort Vision Villas, assumed when occupancy of the conference facility dropped to 20 per cent that it would get better.
It didn't, and it took some months to get all the investors together to sort out Plan B. As a result they've had their first Chinese conference group through this week. Waiting and not taking action wasn't a good move for many investors last year - especially property investors, says Handcock.
One financial mistake that is repeated every year, and last year was no different, is the number of people who "go guarantor" for others. The popular perception is that it's poor people guaranteeing car finance, payday loans, or bottom-feeder borrowing for friends and family.
But plenty of middle-income individuals, usually parents, are caught by this trap. They guarantee a loan for a business or children's first homes, and end up losing their own as a result.
Matthews cites an example from last year of someone in his social circle who guaranteed a son's business loan for a nightclub. "She didn't have enough day to day involvement and the business went belly-up and the son walkabout. She would have lost close to $1 million."
Going guarantor is all too common in our society, says Salvation Army budget co-ordinator Marion Carroll, and leaves many in the older generation with a "spiral of debt".
"Nine times out of 10 they are doing it for family and trust the family member to pay back the debt," says Carroll. '
My son regrets buying an icecream at McDonald's and leaving his wallet in the shoe rack. Let's hope, like Hawes, who has a chapter on regrets in his new book written for his first grandson, the experience is valuable.
To his grandson, Hawes wrote: "Aston, if you make an investment mistake, own up to it. I've found that you learn a lot more from your mistakes than you will ever learn from your successes."
