Whether you're a high net-worth investor, or just hope to become one, there are perils that can derail your investment strategy. What good are savvy stock picks if you're constantly hemorrhaging cash?
Bryce Sanders, president of Perceptive Business Solutions in New Hope, Pa., says many people sabotage themselves by failing to plug the holes. Successful investors know it’s not just the amount of money you make in the market, it’s how much of that money stays in your account. To maximize your profits and maintain your peace of mind, avoid these seven common mistakes.
Underestimating the cost of health care:
Think health insurance is expensive now? The bite is only going to get bigger. “This is a major financial consideration,” Sanders says. “Healthcare costs are rising substantially faster than inflation. What’s it going to cost you going forward? What happens when your employer no longer covers you?” Make sure your investment strategy accounts for this.
Keeping up with the Joneses:
This is an insidious threat. It starts with a BMW and a bigger house and ends… well, it never ends. That’s the problem. This threat requires constant attention because it can easily spin out of control. The years will go by fast, and you won’t know where the money went. “The cost of keeping up with the Joneses can be especially compounded if a spouse isn’t in agreement on spending,” Sanders warns.
Ignoring property taxes:
Unless your house is paid off, your taxes are likely bundled with your monthly mortgage payment. It’s easy to look the other way even as this expense climbs, especially in high tax areas. “Another mistake is maintaining excessive properties. Regardless of your net worth, property taxes can be a major drain on assets.”
Living the same lifestyle on lower income:
A job change doesn't always result in more income. These days, many people are accepting lower-paying positions than they held in the past. The important thing is to adapt to economic realities. Problems occur when you try to maintain your lifestyle on lower income and subsidize your spending by cashing out investments.
Inadequate disability or life insurance:
It’s something we don’t want to think about until we need it. Although statistically it’s a remote risk, if you get hurt, disabled, or killed, you or your survivors can be devastated. Make sure you have adequate coverage to protect yourself, especially considering the costs of long-term care.
Improper asset allocation by age:
You might still consider yourself an aggressive investor, but 45-year-olds don’t have time to invest as capriciously as 25-year-olds. “It’s important to reevaluate from time to time to make sure you have a strategy consistent with your age, risk tolerance, and retirement goals.” You may be wiser, but you’re less likely to recover from financial mistakes.
Not having emergency cash:
One of the biggest lessons you can learn from the recent market meltdown is that you have to be prepared for the unexpected. That means having an emergency account. While it's tempting to tap this account for the latest flat-screen TV or a relaxing vacation, it's more important to have a fund you can use to pay your bills if you lose your job or investments. “In the past, people recommended setting aside six months of living expenses, but that’s really not enough today,” Sanders says. “You should have enough to provide for your family for a year.”
Thanks for joining the discussion, everyone! There are some great comments here. The idea of finding a way to incorporate multiple income streams is sound advice and worth considering. Even a large cash emergency fund can rapidly be depleted.
I agree (and speak from experience) that #7, “Not having emergency cash” is critically important.
When the job is going well, it is easy to spend what you are making and forget about saving and putting cash away for a rainy day.As soon as you feel that way – stop yourself and get a reality check.Stuff happens!If it has not yet, it will.Be prepared by saving.If you do not think you can “afford” to save, then do it by cutting current expenses.After a recent lay-off (and thankfully, I had an emergency fund – although growing smaller as I write this) I continued to “save” by examining expenses that I used to pay without even thinking about.I did not need a gym membership so I dropped it.I shopped around for new car, homeowners and life insurance as well.I cut my monthly expenses by over $300 (if I did this when I was working my emergency fund could have been that much larger!).Anyways, I am saving by not spending and when I do find a new job, I plan to put aside this amount plus more!
Thanks for the post. I totally agree with your point that "it’s not just the amount of money you make in the market, it’s how much of that money stays in your account". Investing in pension/insurance plans is as important as investing in stock markets.
Do you think money set aside for emergency cash is more susceptible for Inflation? What all different methods do we have to save emergency cash ?
The first point about Health Care cost is very important to consider, especially if you are laid-off or "down-sized. My employer generously paid for my health insurance for one month after being laid-off last summer. COBRA for me and my family was $485/month and increased to over $500 after the first of this year. I had emergency cash and I am living way below my means (which is not much these days!), but the health care costs continues to blow my budget every month. To pay for it, I have drawn from my investment account. Fortunately for me, my Apple stock continued to soar and I was able to use some gains to pay the health premiums. Still, that can't last forever and I am uncomfortable betting on the market to pay health care.
I think the #7 can be extended to portfolio management. I always keep a healthy portion of cash asset (about 10%-20%) in my portfolio. There are several reasons to do it, and some of them I learned in a hard way:
1. Cash keeps investor sleep well, you may lose a few points of extra return in short run, but the peace of mind alone will be worth it. As Kenyes once said "Market can keep irrational longer than you can keep solvent". Without a healthy cash reserve, it is much easier to be panic during the downturn.
2. Cash provides investors the opportunity to react quickly to great but short-living investing opportunity. It is hard to jump into the market when market is tanking, it is even harder when you need to sell asset at a loss to raise cash.
3. A Cash position will push investors to look harder for investing opportunity. If you are 100% invested, there are fewer incentives to search hard in the market.
As Buffett pointed out in his latest letter to shareholder, the best palce to keep cash is the US Treasury bills. Investors shall avoid other short term securities, which can be fragile in market like September 2008
It is good to se someone focusing on what profit is actually realized. papaer gains do not buy the milk! All these factors need to be taken into account as you figure what your real gain is. There is no substitute for good planning and understanding what the real gain is.
We need Emergency cash as well as Alternative Streams of Income.Anyone who thinks and believes that holding only one Job alone is enough [Especially as the US Federal Reserve continues to do everything in its power to destroy our Savings]is clearly deluded.
Hopefully,this website and the esteemed contributors here can help all of us readers identify and get to that level of Financial stability and success.
Having Emergency Cash is nice - but only the beginning. Careers Experts now say you should have 3 sources of income. Not jobs - but income sources. Should one fail you can continue your lifestyle without draining the emergency cash.
#7 is so very integral at a time when a potential government shutdown is looming, we are coming out of a recession and unemployment is skyrocketing. It is extremely important to put something aside for a "rainy day." Please people, take 5-10% of that paycheck and save it...you never know when you'll need it.
In today's uncertainty riddled sceanario;I liked what you said here the best
"Not having emergency cash: One of the biggest lessons you can learn from the recent market meltdown is that you have to be prepared for the unexpected. That means having an emergency account. While it's tempting to tap this account for the latest flat-screen TV or a relaxing vacation, it's more important to have a fund you can use to pay your bills if you lose your job or investments. “In the past, people recommended setting aside six months of living expenses, but that’s really not enough today,” Sanders says. “You should have enough to provide for your family for a year."
Having enough cash as well an alternative income stream that helps you to last you for a year is a very powerful and comforting (pscyhologically) cushion.
Today the Job market is extremely uncertain ;just because you have a well paying job today does'nt mean you will have one 3 months from now.
But that also does'nt mean that you should put in 24 hours at work everyday for 7 days a week,either(or sit up late at night worrying about what happens if you lose your Job).
Planning for your future is key.Absolutely the key here.And that takes time,patience and an honest appreciation about your Skills and what your worth in the marketplace is.
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