5 Bad Financial Decisions and How to Recover

Everyone makes a bad financial decision at some point. Whether your mistake is hanging onto a stinker of a stock for too long or stumbling into a black hole of credit card debt, recovery is possible.

One of the most important aspects of the salvage mission is having the ability to learn from past mistakes.

Though this list is far from comprehensive, it outlines some frequent missteps consumers make as they navigate their finances.

There are active management strategies in which a preset event triggers a decision to buy or sell. And then there is random flailing. That would be the strategy in which investors randomly sell positions after losing money and then buy back in after the market recovers.

"One of the biggest mistakes is when you start looking at your long-term investments as short term," says Carlo Panaccione, founder and president of the Navigation Group in Redwood Shores, Calif.

That's most likely to happen "when people decide I'll get out (of the market) until things look better. But by the time things look better, the market has already recovered," he says.

How to recover: If you've jumped out of the market, dollar-cost average your way back in. Dollar-cost averaging involves investing a set amount of money on a regular schedule, regardless of market moves.

"Put in a little bit every month over 12 or 24 months. If the market goes up, you'll get some of the upside. And if it goes down, you'll buy it cheaper," says Panaccione.

If market volatility will worry you in the future, meet with an investment adviser to devise a plan for the next time the market tanks.

Just like a boxer needs to learn how to take a punch, investors must eventually learn to take a loss. Not every investment will be a winner. It takes emotional discipline to recognize the mistake and cut your losses.

"If it just stinks and is never coming back, don't hold onto it for 10 years trying to make your money back, because you may never get it," says Panaccione.

How to recover: Instead of hanging onto a dead investment, take the tax write-off provided by a capital loss when it makes sense for your overall tax picture. Bankrate's story, "Use capital losses to cut taxes," explains the tax considerations of deciding when to sell a security.

"If people are taking a risk on an investment, they may as well do it in a taxable account where they can take advantage of the tax write-off. If it goes screaming up you might get taxed on it, but I don't think you'll mind if you make a ton of money. On the downside, you don't want to have it tank and miss the write-off because it's in an IRA," Panaccione says.

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