Don’t expect to see a flashing warning sign when you receive some terrible investing advice. The advice-giver could be a scam artist or simply misinformed, but the end result could be you losing a bunch of money.
Even years later, these three people can vividly recall the worst investing advice of their lives. Reading the lessons they learned may help you steer clear of similar scenarios. Here’s what happened:
Tricked by a tape
A cassette tape got Jason Escamilla into investing in the stock market. And he lost about $2,500.
Let’s rewind. In the early 1990s, Escamilla worked as a valet at a country club in the San Francisco Bay Area. During one shift, he hopped in a car and heard a cassette playing over the stereo system, touting the merits of a penny stock.
“I felt like I got this inside edge, and that it was an edge I could act on and profit from,” Escamilla recalls. He says he didn’t have anyone to vet the idea with. Instead, the then-college freshman and first-time investor chased down an obscure penny stock broker, where a smooth-talking salesman sold Escamilla about $2,500 worth of stock.
The get-rich scheme turned out to be anything but, and he lost his money. Fast-forward nearly 30 years, and Escamilla can’t remember the name of the company but recalls how much he enjoyed talking with the salesman: “My interactions with him were great, except for the part where my money disappeared.”
Rather than shying away from the stock market after this costly misstep, Escamilla went on to pursue a career in finance. He’s now the chief executive officer of a registered investment adviser that focuses on social-impact investing.
Lessons learned: Escamilla realizes he fell for a pump-and-dump scheme, an illegal maneuver in which someone who holds a stock boosts its price through false or misleading statements and then sells, causing the price to fall.
Moreover, what Escamilla perceived to be an “edge” wasn’t — and inexperience led to him being scammed. “This early mistake surely colored my distaste for the practices that are so common in the retail investing world,” he says.
‘Insane’ gambling
Sean Dodds sought help from a financial adviser because he was done “gambling” with his money. The irony? That same adviser eventually made a series of risky bets.
Like many investors during the late 1990s, Dodds played the stock market, betting on companies like Qualcomm and Oracle. He made a lot of money and mostly escaped the bubble’s ruinous effects, he says. In the mid-2000s, ready for a change and heeding a trusted recommendation, Dodds hired a financial adviser.
Even though that adviser was “very slick,” he earned Dodds’ trust — partly because the person who’d recommended him is a “very savvy guy,” says Dodds, who works in software development and lives in Gainesville, Florida. As importantly, his investments fared well for a few years. When Dodds heard that the adviser was putting together a new investment fund — one designed for people with a healthy tolerance for risk — Dodds asked to be included.
“[My adviser] didn’t hunt me down and come get me saying, ‘Boy, do I have a deal for you.’ It wasn’t like that; I had a sense of ownership in what happened,” Dodds says. He invested a large sum in his adviser’s new fund — right before the market crashed.
As stock prices fell in 2007 and 2008, so did Dodds’ investment. But he didn’t know the severity until his adviser called to say 14% of the original value remained, Dodds recalls. A few days later, another call: Only 1% was left.
Dodds knew he was taking a risk but he didn’t sign up for “insane gambling.” Unbeknown to him, Dodds’ adviser had made leveraged bets (investments offering amplified returns — and losses) that the market would rebound, even as it was falling, and repeated this losing bet numerous times. “I was a bit shocked and appalled,” he says.
Dodds withdrew his remaining money from his adviser’s business (not all of it was invested in the fund — “I’m not a total idiot,” he says), but the damage was done. “The financial loss was a big, big, big heartbreak,” Dodds says.
Lessons learned: With hindsight, Dodds sees the red flags: a first-time money manager who didn’t communicate how the money would be invested and whose qualifications went unverified. In addition, the two never spoke about how much Dodds could afford to lose.
No longer the “swashbuckling” investor of his younger years, Dodds has reimagined his risk tolerance. Initially, he adopted a too-conservative approach that left him on the sidelines, rather than invested in the market. He finally got his “head straight,” he says, and for several years has stuck with a prudent and proven approach: investing in low-cost index funds.
Unsolicited (and unheeded) advice
Like many recent college grads, Seth Snyder was juggling the demands of paying off student debt and saving for retirement. But he was doing it all wrong — at least according to some unsolicited advice.
After graduating in 2014, Snyder found himself in a discussion with colleagues about debt, he recalls. Someone asked Snyder whether he had student debt.
Indeed, Snyder was making regular student loan payments while simultaneously contributing to his company’s 401(k) plan, which he considered to have a “very generous” match. “This person advised me that right after tax season, I should liquidate my 401(k) to pay off student loans,” says Snyder, who now works for a startup in Austin.
Snyder had done his research. An early withdrawal from his 401(k) would incur a penalty (10% for people under the age of 59½). “I knew it was a terrible idea,” he says.
Even as Snyder told the group why he wouldn’t follow that advice — the penalty would outweigh the interest on the loan — one person was unrelenting. “He had this old-school mentality that you should never owe debt to anyone,” Snyder says. “He was sticking to his guns that one should get rid of debts at all costs.”
Lessons learned: “That was my first introduction in the real world that most people aren’t financially literate,” says Snyder, who had the benefit of two accountants as parents.
Now he tells that story to friends to illustrate that bad advice can come from well-intentioned people — and the importance of doing research. “Some people might have rolled with it.”