Five Crucial Money Mistakes Rich People Never Make
How to make sure you don’t make these mistakes
CNBC recently ran an article called “Five crucial money mistakes rich people never make”. It is a good article. In summary, it covers five bad habits that we tend to have when managing our money. These habits lead to mistakes which cost us money. Rich people understand how to manage these habits.
Here are the highlights from the article. These highlights should get us thinking “How do we as the ‘not quite super rich’ put this into practice?” Answers have been given under each highlight to show how.
1. Doing it yourself
When the stock market falls sharply as in the Dot Com bust or the Lehman Brothers collapse, you have to know what to do and have the experience to make decisions based on data, not on emotion alone. This is difficult to do. Rich people remove the possible emotive and impulsive response by hiring financial planners and tax advisors. Yes, there is a fee, but avoiding a knee jerk reaction for the investor can be a really good investment itself. From experience, I know that investors get stressed when markets fall and tend to make decisions on a very short term basis that cost them a lot in the long term.
Before starting your planning, a good financial adviser will discuss with you what is important in your life. Ongoing advice and regular reviews, giving support especially if markets go down, is essential. Transparency by the adviser about costs and also giving you the cons as well as the pros is necessary. With these principles in place, trust develops between you and your adviser.
2. Not diversifying
The super rich diversify their investments. It is true that if you are very wealthy, then it is easier to choose a wider range of things to invest in. However, diversifying is still possible, and definitely advisable, if we are not quite in the super rich category. How to diversify depends on your requirements for access to your money, how much reward you would like to achieve (which means how much risk you are also prepared to take) and what the timescale is for your investment.
Make sure that your planning includes diversification. No eggs all in one basket, but different types of eggs, in different baskets and even on different farms. You may also want some eggs to hatch at different times than others.
3. Fad investing
Rich people either avoid fads OR they have the contacts to be one of the very early investors. Bitcoin is the latest example of fad investing. It became a fad and the price shot up. It has since fallen back some 70% and now bounced a little. This is the problem with fad investing. By the time we hear about it, it is already a fad and the price is high. So we buy in at elevated prices. Then the fad passes and the price falls. Typically, it is not easy to know when the next new fad will come along and the one we have just invested in has passed. This means we often end up with a fad where the price has fallen, sometimes substantially, when we want to sell.
Warren Buffett, who is famous for his philosophy of investing in what he knows and then holding on to it for the long haul, told CNBC last year that “in terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.”
Warren Buffett who is ultra wealthy ($80 Billion ultra wealthy), also says “The difference between successful people and really successful people is that really successful people say no to almost everything”. A great way of saying, no fads.
4. Lack of a long-term plan
Wealthy investors think about their future and often about the future of their children and grandchildren. They plan for this future by investing in the future. They don’t just think about ‘how much money have I made this year’. They monitor and measure how their investments are doing against their plan, not just against what the market is doing. They also look at how will the world change and therefore where they should invest. With retirements now stretching many more years because we are living longer, this way of thinking is now required by all of us.
A cashflow model of your financial future, all the way to age 110 just in case we live that long, is a good basis for your planning. Not only can you see in graphical format what the future might look like, but it has a “what if” function so that you can check out the long term impact of a financial decision before you make take the decision.
Super Rich people generally have a good sized pot put away for a rainy day. If they need money when the markets are down, they don’t need to sell investments at a bad time. So they don’t panic if markets or property prices take a fall. It is a good idea for us to keep a rainy day pot of money available so that we do not have to panic.
This is the starting point of building your plan. Before doing anything else, check on your planned expenditure and identify how much your expenses are each month. Put aside enough money in a rainy day account with easy access so that you will not have to panic.