Wealth destruction - it's all too easy if you ignore the rules
OPINION: I enjoyed reading a paper recently entitled "Secrets of wealth destruction" because it encapsulated many of the time-tested lessons that every investor should know, but we often ignore.
It wasn't a "how-to" guide to wealth destruction, rather it was a list of things not to do when investing and trying to grow your wealth.
The first suggestion was to avoid being an undocumented investor. It noted that many investors start their investing journey by picking an investment or two, without first documenting the rules by which they're going to invest.
It sounds boring, but if you don't first plan how much you're going to invest, how you're going to choose the best investments for you, how long you're going to invest for, and how you'll decide when to sell, you will end up flying by the seat of your pants.
It's a bit like going to the supermarket when you're hungry, without a specific shopping list - you'll put far too much of the tempting junk food in your trolley and forget to buy the broccoli and beans!
The second lesson was to avoid concentrating your investments in one place, in the hope that you'll win big. Economies are cyclical and so are sectors and industries. Some years the success stories will be the property developers, sometimes it's the landowners, and other times its technology start-ups.
The point is that each industry has its day in the sun, and so do investments. If you don't want luck to play too big a role in your wealth creation, you should spread your funds across a number of investments and sectors and geographies, to improve your chances of striking the winning one.
Another valuable lesson is to avoid contracting "affluenza". This is a term used by critics of consumerism. It's sort of a combination of wanting to keep up with the Joneses, and wanting instant gratification rather than waiting and saving. The writer of the article suggested that an easy guide to whether you have succumbed to affluenza or not is to estimate your net worth according to a set formula:
Expected Net Worth equals one-quarter of (age minus 20) times (Annual income).
If your wealth is above or below this number, then you have been efficient or inefficient building your wealth for your age and income.
While I'm a little wary of such rules of thumb, I nevertheless agreed with his suggestions as to what can drive wealth inefficiency. These include being a self-diagnosed "big spender", having no investment focus, living in a capital city where costs are higher, being single and not being in a partnership to share expenses, and not having been actively investing as long as others your age.
Other lessons included not following the herd, not relying on an investment guru (instead learn the basics yourself and recognise that nobody is infallible) and stop thinking you're immortal (do something early so that you don't end up outliving your wealth).
While all the lessons were quite sobering, I figure it's better to learn from someone else's mistakes than to learn the hard way on your own.
- © Fairfax NZ News
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