It’s hard to believe that tax season is here already. In an effort to help our clients be...
The 10 Biggest Wealth Management Mistakes
I would prefer to write an article on the 10 biggest things people get right with their wealth but unfortunately research shows a list about mistakes get more views, so here we are…
Over my many years in this industry, I have learned there are common mistakes made by the most novice of people to the most knowledgeable people regarding money. Making these mistakes is not a reflection on a person’s knowledge necessarily. Many of these are well known but for a multitude of reasons even the more knowledgeable people still make them.
I did write an article a couple years ago regarding the most common mistakes people make with their estate planning, and there is some overlap in this article but this list is broader in regards to one’s overall wealth plan.
Without further ado and in no particular order, here are the 10 Biggest Wealth Management Mistakes:
- Not having a plan. I believe an individual or couple should view themselves as a CEO/co-CEOS over their wealth. They either need to act as CFO or hire one. In either case, research from Oregon University shows businesses with a plan grow 30% faster than those without. Planning is not budgeting. Any talking of setting and living by a budget will end a financial plan discussion for many. I get it, budgeting is time consuming and can be frustrating. Do not confuse the two, a financial plan is much broader.
- Not having a complete estate plan. This really doesn’t need much color. An estate plan can be easy and cheap. There really is no excuse to not have a plan. If you have minor children and do not have at least a will with guardians set, you could be putting your kids in great danger.
- Too much of their financial life with your employer. Many people have too much tied into one company. Salary, bonuses, stock options, 401k matches, and maybe even a pension. They can become emotionally attached to the company. One area not discussed enough is life insurance. Having all of your life insurance provided by your company can be very problematic later if it is not portal. If you get let go for any reason and you are older, that insurance disappears and now you are trying to get it at an older age. One better hope they don’t have any health problems when searching at on older age. You are gambling. It is best to have a policy not tied to your employment.
- Taking excess risk or being overly conservative. I am not a fan of the risk tolerance questionaries most financial firms make you complete. Sure, it is good to know but for most people it really isn’t what should drive the risk you take. You should only take the risk you need to meet your goals. Excess risk is greed and no risk is fear. It should not be an emotional decision. I use this often, but if you only needed a 6% return to meet your life goals, why be greedy and chase more, especially if it could mean you don’t reach your goals? Take a small amount and gamble. Don’t risk your life goals. On the flip side, don’t let irrational fear keep you from reaching your goals either.
- Impulse purchases. They can be very detrimental to building wealth. Just avoid them.
- Not having disability insurance. Two stats to prove why it is important. 1. Per a Social Security report, a 20-year-old is 25% likely to miss work for a year due to disability in their lifetime. 2. Disability is not just accidents. In fact, the majority of disability claims, per the Council for Disability Awareness, are due to illnesses like cancer and heart disease, as well as back injuries.
- A lack of tax planning. I think most agree we want to pay less taxes on the same dollar of revenue than more. Effective tax planning can help you do this. This isn’t just while you are working. Having a tax efficient cash flow plan in retirement is imperative to prudent financial planning.
- If it sounds too good to be true, then it isn’t. If I could teach every young person this important financial principle, we could eliminate most investment scams. There is a risk-free rate, which is the short-term treasury bill, or you could substitute CDs as long as it is under $250,000. If an investment has an expected return higher than that, there is risk. The higher the expected return, the higher the risk. Offshore CDs paying double digits, “risk free” annuities paying double digits, an investment manager named Maddoff promising 18% returns annually are not risk free.
- A lack of diversification. Unless you are the highest of risk takers or you just don’t have any other alternatives, like having all your wealth tied up in unvested stock options, make sure you are diversified.
- Not understanding the “red zone.” The 2-3 years before you retire and especially the 2-3 years after you retire are the most important years in your retirement from an investment perspective. How many of us know someone who retired right before a bad market only to have to go back to work? Be very careful being overly aggressive right after retirement. Your plan should have a stress test to know your probability of success
The best news is most of these are very easy to prevent. The hardest part is removing emotions from money, whether it be impulse purchases, greed, fear, pride, ego. etc. Once you conquer that, your financial future will become crystal clear.
