There are countless tales of riches gained and then lost. Why are there so few that remain permanently wealthy? Here are some common ways to destroy wealth, in our opinion…
The quickest way to go from wealthy to poor is to borrow too much. Aussies love their debt. Our outsized debt levels are yet to be tested as interest rates have fallen over the last 32 years. Despite the popularity of borrowing to invest, it is not rational to risk what you already have and need for what you don’t have and don’t need.
One of our most important functions as advisers is to stop people from making bad decisions with their finance. There are far more things one can do to destroy wealth than create wealth. In my 16 years advising, most bad decisions can be avoided by staying rational rather than trying to be the smartest in the room.
Chasing Popular Trends
The lure of quick money is eternal and the riches it creates are usually ephemeral. Sir Isaac Newton lost all of his money in the South Sea Bubble. It is more often than not that popular trends do not end well. The latest fad is cryptocurrency, which is fraught with risks that are not comprehended by many. A word of caution to many who attempt to make a quick buck from this new mania – tread carefully.
Wasting Money on Non-productive Depreciating Assets
Most boats, cars and planes depreciate over time. In light of this, a good saying to live by is, “If it flies, floats or speeds – rent it.” The wealthiest people I know spend the least amount on cars.
Estate and Family Disputes
Family disputes over money are far more common than many realise. A well-structured estate plan can enormously minimise these risks.
While inflation has been lurking in the shadows for a few decades, it still exists. Inflationary pressures – in our opinion – will be more prevalent in coming years as a result of excessive stimulus packages and money printing by various governments globally in response to the pandemic. Few comprehend the rapid decline in assets if a conservative portfolio has little to no return, while drawing down a moderate 5 per cent amount with mid to high single digit inflation. Being too cautious may be risky for some.
While the risk of someone stealing the family jewels from the safe hasn’t materially increased in the last few decades, cybersecurity risk has increased enormously with the prevalence of the internet. It is becoming increasingly important to protect your wealth from criminals in other countries hacking our computers. We suspect this risk to increase over time.
Rob Shears is an Authorised Representative of Valor Financial Group (AFSL 405452). This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.