Six Wealth Management Mistakes and How to Avoid Them
Delwin Graham & Eric Brown - Aug 13, 2020
It doesn't matter how much investment capital you have behind you—if you don't guard against common financial mistakes, your portfolio and its growth is at risk.
According to research, there will be 7.7 million more high-net-worth individuals (HNWI) in the world by 2023. What does it take to become HNWI? For some, it's luck and opportunity that will get them there. For others, it's acute business acumen. For most, however, it's making smart financial decisions.
However, smart decisions are not the only factor at play. Avoiding potentially lethal wealth management mistakes is also an essential element. It doesn't matter how much investment capital you have behind you—if you don't guard against common financial mistakes, your portfolio and its growth is at risk.
If you want to make sure that your wealth management plan is watertight against these mistakes, read on as we share our insight with you.
1. Not Enough Working Capital
There are many benefits of emergency funds, and they are important in both a personal and a business setting. A common rule of thumb is that one should have six months of work of living expenses in the bank (or in some liquid form) as an emergency fund. While many of us adhere to this, what we often don't do is the same for our businesses. If you operate a business, it’s essential that you set aside working capital that can cover operations during unexpected times.
If this sounds conservative, take into consideration the pandemic. Reports show that 100,000 businesses have undergone COVID-19-related closures. And these are not all small businesses. There is a growing list of multimillion-dollar companies that are filing for bankruptcy as a result of the pandemic.
In some cases, these are big-box retailers whose days might already have been numbered. However, in other instances, a healthy amount of working capital could have allowed some of these businesses to ride out the temporary drop in revenue.
Traditionally, a working capital ratio of 2:1 was deemed overly cautious, with not enough reinvestment. However, in these uncertain times, a ratio that was once considered to be heavy on the short-term assets side might now be more suitable.
2. Growing Your Lifestyle at the Same Pace as Your Earnings
One of the most common financial problems is spending all of what you earn. As your earnings grow, it's natural that your lifestyle will expand. So natural in fact, that, if you're not careful, what is known as lifestyle inflation can outpace your sources of income.
It doesn't matter whether you net 10K a month or 400K. If you do not plan your lifestyle expenses, investment goals, and where to spend money, your lifestyle can easily grow to eat up all of your available income.
The takeaway is to ensure that your lifestyle does not inflate at the same rate that your income does. Instead, it should ideally lag behind by around 20-30%. This way, you will have access to new capital on a continual basis that you can leverage for your financial and investment targets.
Although most of us would like to think of ourselves as above emotions when it comes to financial matters—this is not the case. A growing body of research shows that emotions are a governing factor in money matters. This is especially true when it comes to investing and trading.
One of the tenants of trading and investing is avoiding panic-selling. Panic-selling is inspired by emotions of fear and is not informed by analysis or risk management. In order to preserve and grow wealth, investors need to have the mental fortitude to ride out dips in the market. Sells should be triggered by risk-management strategies such as stop losses, tax planning strategies, and in-depth fundamental and technical analysis.
Another point to keep in mind is that when the market bottoms out, it is generally the time to enter a buying mindset, not a selling mindset. For example, if you were investing in the peak of the coronavirus stock crash, you could have bought up a variety of underpriced stocks.
4. Not Diversifying Your Portfolio
Diversification is one of the underlying core principles of risk management. To not only grow your wealth but secure it and lock in gains, it is essential that you diversify your investments.
When building wealth, it can be tempting to become trapped into an accumulation mind frame. This could look like investing heavily in one particular stock that you think is bulletproof. While the shares may have performed well and netted attractive gains, nothing lasts forever.
To avoid putting all your eggs in one basket, ensure that you look at gaining a distribution mindset in conjunction with realizing gains.
5. Not Doing Tax Planning
If there is one certainty when it comes to investing, it's that as your profits grow so will your tax burden. One way to mitigate this is via savvy tax planning.
In order to minimize your tax burden, it is essential that you plan your investment actions in advance. For example, say you have an investment that is at a loss and has been for some time. There is also not much chance that it will improve. At the same time, you have another investment that has done well, which you would like to cash out of. In this situation, you would do well to time the sale of both of these investments within the same tax year.
6. Not Engaging a Financial Advisor
One of the top wealth management mistakes that people make is not engaging a financial advisor. DIYing wealth management can yield some results. However, it is also a risky path. Having a professional's advice can be invaluable and protect your portfolio from common wealth‑management mistakes.
A financial manager will be able to provide unbiased judgement that is not clouded by personal emotion. They will also be able to formulate a risk management strategy for your assets and assist you with tax planning and estate planning.
Don't Make These Wealth Management Mistakes
Managing one's own wealth can be exciting, but it can also be stressful, complex, and risky. However, if you implement the above tips, you will be able to maximize your investment strategies and lower risk.
Before we go, are you making the last of our top, common wealth-management mistakes—not hiring a financial advisor? If so, you have come to the right place. Here at Graham Wealth Partners, we are passionate about our client's future and finances as a whole. We pride ourselves on putting integrity and transparency at the forefront of everything we do because of our clients and their financial-security matters.
Would you like to have a team of professionals on your side that can help you build and protect wealth, as well as provide sound financial planning, insurance advice, tax planning, estate planning, and more? If so, take a look at our services or contact us today, and we will be happy to answer all of your questions.