Posted by Jill Kerby on December 24 2013 @ 09:00
R€solutions 2014 Part 1: Common Financial Mistakes …that Warren Buffett Never Makes
“I think it fair to say that most of my clients would be much richer today, not because of the clever, financial decisions they made, but because they kept making so many smaller, foolish ones.”
A well known financial adviser – and rich man himself – shared this simple statement with me nearly 20 years ago. He wasn’t just referring to his high net worth clients who may have made a few extra millions if they had been more diligent about their stock market portfolios, but about the ordinary one who just kept losing more money than they made through a combination of ignorance and greed, impatience inertia.
What better time than the start of a new year to test the great American investment manager Warren Buffett’s number one investment rule – “Don’t lose money’. Next week, in Part 2, we can then look at ways to make some money in 2014:
- Failing to have a personal budget: How can you know how much money you have to spend if you don’t know exactly how much you (and your partner/kids) earn, the state of your debt, how much tax you pay and other outgoings. A proper budget means you can take action to tackle your debt, prioritise your spending and make long-term financial plans.
- Never having any financial goals: The most successful people set themselves goals not dreams. The young person who sets out in their working life saying “I never want to be in debt … I’m going to be financially independent someday,” is a lot more likely to have a saving and investment regime in place than the one who says “I haven’t a clue about money, I’m too young to bother about a pension…I wonder how much the bank will lend me?”
- Ignoring the impact of tax: You do this at your peril. Business owners are favoured by tax law, PAYE workers are seen as nothing more than tax serfs. Yet everyone can, with good tax advice, avoid unnecessary tax. The Irish income marginal tax rate is 52% on ever penny over €32,800 but when VAT, DIRT, capital taxes, excise, levies are taken into account, the state takes the bulk of your earnings and a chunk of your wealth.
- Failing to understand investment risk: This is a mostly a consequence of lack of knowledge, stupidity and greed. There is no such thing as a risk-less investment or “sure thing”. Leaving all your money in a “safe” deposit box ignores the risk of taxation, inflation and confiscation (especially in Europe which is riddled with insolvent banks.) Stocks and shares are both subject to the natural volatility of the market place and the manipulation of markets and money by central bankers. Age is a factor: the younger you are, the more risk you can time is on your side to help make up any early losses.
- Handing your money to strangers to manage: A guaranteed way to lose money is to give it to a stranger who says he can manage it better than you can yourself. Finding suitable places for surplus income/savings is not rocket science but it require some research, patience, and diligence.
- Always buying high and selling low: It’s human nature to want to buy the ‘good news’, especially if it’s a financial asset, but you want to be ahead of the crowd in identifying a bargain property, stock or share, commodity. Buying great shares in great companies when the crowd has lot interest (and its money) like after a stock market crash) is also counter-intuitive but highly profitable.
- Never insuring against catastrophic risk: Losing a mobile phone is not a catastrophe. Losing your life is, especially if you have dependents and insufficient life insurance. Too many of us spend more money than is justified insuring small ticket items (even cars) and not enough against untimely deaths or serious illness/disability that can have devastating financial effects.
- Always making assumptions: “I assumed my interest rate had changed…”; “I assumed my mortgage/pension/health tax deductions were done at the office…”; “I assumed my no-claims bonus was protected…”; “I assumed that ‘whole of life’ insurance lasted forever…”; “I assumed the bank manager/insurance agent/snake oil salesman knew what they were talking about…”; “I assumed there would always be state healthcare/education/old age pension…”
- Ignoring time…and its effect on money: The best advice a young person will every ignore is: ‘save your pennies’, ideally in conjunction with a good, default managed fund or pension scheme that they can assign 10%-15% of their pre-tax earnings. The effect of time on human beings is relentless, but its effect on money is utterly magical. Compound interest works both ways: it can quickly bankrupt the holder of an unsustainable debt; but it can also slowly turn a young, steady but modest investor into a millionaire in their lifetime.