smart spending

4 dumb financial moves in the recession

Regret 3: I greedily overinvested in a 'sure' thing.

Outsmart yourself: Studies have shown that the human brain's "wanting" system strongly activates when an asset goes up in value, driving us to buy more, says Paul Zak, director of the Center for Neuroeconomics Studies at Claremont Graduate University.

So even if you've sworn that you'll never again put the bulk of your wealth in a single asset, like a house or a stock fund, what's to stop your brain from getting excited when the next "big" thing rolls around?

Enlist your financial adviser, your partner or a trusted friend to dampen your excitement, says Michael Ervolini, head of the Boston behavioral finance firm, Cabot Research.

While a broker or financial adviser may not actually be able to prevent you from dictating that you'd like to sink your money in one investment type, you can ask him, even put it in writing, to dissuade you.

Cleveland financial planner Kenneth Robinson says his clients sign off on a written asset allocation plan, which helps them stick to the resolve to diversify.

And, says Ervolini, especially if you invest with a partner who has a vested interest in the success of your investment plan, establish a pact that you won't make moves unless you've both talked it over.

Finally, for those who can afford to set aside some "play" money, a separate fund can placate the desire to follow the hot trend without "betting the farm," says Zak.

Regret 4: I didn't read the fine print on my loan.

Outsmart yourself: If you're one of those homeowners with a mortgage that seemed cheap initially but has since proven ridiculously expensive, chances are "you were just following what you thought was acceptable wisdom" when you took the loan, Ariely says.

"Figuring out how to borrow is very complex," he says. Instead of delving through loan documents and plotting out just how much payments can rise, consumers are lured into complacency when they hear platitudes like "you can always refinance" or "if you're moving again in a few years, you don't have to worry."

Make a pact with a partner or friend that you won't take on debt without reading all the fine print, says Ervolini.

The federal government aims to make that easier with proposed reforms, like requiring a lender to give a one-page outline of a loan's risky features.

Still, complex loans will likely stick around. Ervolini says, "If you are not willing to read and really understand what a loan is all about, pledge that you'll go with the plain vanilla option."

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