https://seekingalpha.com/article/4415658-how-to-avoid-losing-all-your-money
Summary
- One of the most common misconceptions is that once you have money or certain capital, it's difficult to lose it. This is deeply flawed - it's entirely possible.
- Going from million/millions to zero is certainly possible, and there are just as many ways to do so as to go from zero to a million.
- I spend a lot of time researching and looking at both sides of the coin - and in this article, I'm talking about how to avoid losing all your money.
Those of you that follow my articles know that I recently reached a milestone in my own investing. This milestone of $1M also comes with a great deal of consciousness of where you're at, where you could be going, and what dangers lie on the way.
I've always been an extremely conservative and risk-conscious individual.
Well, when I started out investing, I thought I was pretty conservative. Today I'm about 3-4 times as conservative an investor as I was back in 2010. I took risks back then I would laugh at today - not even consider.
But this comes with learning - this comes with knowledge. I've learned so much over the past decade - about myself, about people, and about the market and the world at large. Compared to many entrepreneurs and older investors, I still have massive amounts to learn, but I'm certainly in a better place than I was a decade ago.
This also means that I've seen a lot of people fail - around a dozen or so. By that, I mean that I've seen people go from having a respectable portfolio or investments, or wealth, and go to zero from there.
Several of them have gone into deep debt and declared personal bankruptcy. That's brutal. It's extremely hard to get back from it.
I wouldn't wish it on my worst enemy.
The fact is, that even if you have money, and perhaps more if you do have money, you need to be extremely wary of what happens and where you go from there. There are both similar dangers to when you don't have as much capital, but there are also dangers that aren't really there until you do have money.
In this article, I want to talk to you about some of the ways that people lose money.
And I mean serious money.
I've seen a colleague and an old boss of mine, as recently as 3 months ago, go from a $5M-$10M net worth, to essentially zero and bankruptcy, which was a very sobering experience and taught me what not to do.
(Source: Unsplash)
So without much further intro, let's leap right into it. I'm going to make it a numbers-sort of article, so here goes number 1.
1. Penny-Pinching and Ridiculous Splurging - at the same time
This one might be hard to grasp for some, so I'm going to use lots of examples here because I've seen this one quite a bit.
Millionaires as a whole are usually pretty frugal people - this includes me. They're "good" with money. They're the sort of people who'll dispute charges, be careful about the salaries of the people they employ, careful with eating out and be very strategic about their day-to-day purchases and expenses.
However, they're also sometimes ridiculous when it comes to expenses they'll accept. I've seen a colleague of mine not wanting to eat out one night for $40, only to turn around and buy a boat for $25,000 because his spouse wanted a boat for the summer. Or, another example, not wanting to buy a new computer, but one month later going on a paid vacation to Maui costing about $19,000.
My point isn't that these things shouldn't be done.
You can take expensive vacations or buy boats if you feel you have the money. But people sometimes have a tendency to forget the luxury buys and focus on those small purchases and recurring expenses. Eventually, it can come back and bite you. The point is to cover all of your expenses and potential buys, and treat each one with the care it deserves - and the expensive buys with more care than the cheaper ones.
It's a habit a lot of rich people have - they watch their money, but at the same time, they sometimes don't seem to notice spending "too much" of their net worth on luxury. Eventually, that really stacks up, no matter (almost) how rich you are.
2. Losing track of the details
This is the other way, somewhat related to the first point.
The way to get rich is fairly straight-forward, as I see it.
You combine or do one of the following things.
- Living below your expenses/means and save.
- Expand your income/revenue streams over time and save.
- Inheritance.
It's usually one of these things. If you inherit or expand your income streams, you're liable to fall into the trap of not paying attention to some of the aforementioned details. You don't look at your personal economy or your bank transactions. You don't look at bills, purchases, or investments, and you don't do economic reviews.
Simply put, you pay more than you should for things.
This is one of the ways you could easily cripple your economic development, and I've had one friend who actually went into a real downward spiral because of a mix of these factors - though, in the end, he did save himself.
However, if you mean to be rich, or if you mean to avoid becoming poor, you need to get into the habit of at least knowing or somehow managing your revenue streams and expenses. If you really can't do it, you need someone you trust to do it for you.
Details are important.
(Source: Unsplash)
3. Emotion
Investing and money management is a cold, no-nonsense business. You can't get attached to your darlings, to your investments.
Ever.
I don't care what the business is. I don't care how long it's been around, how long a dividend tradition it has, or how good the management is. Every business can fail. Every single one.
In my relatively short investment career, I've seen this time and time again. I've also taken note of the early warning signs of exactly what I could have done to predict their failure and rotate that investment. I've also learned a lot about how to do just that - taking emotion out of it.
Too often investors get stuck in their buy-and-hold strategies based on not logic or faith in the company's future - oh, you've owned that business for 10-50 years, you can't sell it, surely things will turn around (all the while cash flow is going down the toilet and the outlook is abysmal).
One of the things I do very often today is taking a look at my investments that are performing poorly, or performing well - over a long period of time - and comparing them to potential undervaluation investments.
I don't sell often - though as of late, I've sold 3 positions to some degree due to overvaluation. However, it's important not to get emotionally involved in any of your investments.
It was difficult for me to sell out of Norwegian metal/aluminum, as I've held it for years - but I knew that was emotion, not logic, and that was overvaluation. Sometimes it's important to cut your losses, and that's even harder.
Regardless of how you choose to do this, you need to have a plan for getting in and out of investments when necessary. I'm not talking about this as an inevitability - I have positions that I've owned since day 1, but if things reach or drop to certain levels, you can bet that I'll be rotating them as well.
Do you love one or some of your positions?
Be sure that that emotion doesn't get in the way of making money - because money doesn't care about you.
4. Lack of diversification
Readers know that I diversify a lot, with over 50-60 significant positions in my investment portfolio at any one time. I know investors who only invest in one thing, such as tech or growth stocks. Or, investors who have everything in the real estate market.
The thing is though, markets can dry up. Undiversified investors, especially investors with their investments tied to hard assets or commodities, are then sometimes forced to sell their hard-earned assets at discount prices. That's a position you never want to be in, and a position I never want to find myself in.
So I diversify.
Never more than 3-4% in any one position in my investment portfolio. I don't invest in real estate or other options due to the way such things are structured where I live, though I may buy rental properties in the future or if things improve. But I diversify into sectors, into companies, into high yield, low-yield, and many other things.
We saw the results that this sort of diversification had last year, during the pandemic. Some of my companies did pause their dividend. Most didn't. If I had to, I could have easily lived and thrived on just my dividend income during that entire year. Since that year, that income has grown even more - but diversification was one of the things that allowed me to stay cool-headed and not really care how things went on the market, knowing that my companies, most of them and as diversified as I was, would continue to pay out my cash in most any situation.
Diversification is key. Three to four different income streams are ideal for someone.
Me, I have run my companies which means I take a salary. I also get my dividends, and I also get paid for other small things on the side. I would say that I currently have three streams of income, and the dividend stream is subdivided into many, many others.
Any one of the streams of income would be enough to have me survive at any one time - all of them together, diversified as they are, really elevates things to the next level.
So - diversify.
(Source: Unsplash)
5. Lack of Planning & Lack of foresight
So you're rich/wealthy, and you're in a position where you're feeling comfortable. However, you don't plan. You don't have a 6-month, 12-month, 3-year, or 5-year plan.
That's a huge mistake.
Lack of planning can cripple anyone. I've seen it ruin people.
This is about things as basic such as taxes, to things as hard as something like a will or an estate plan. Depending on where you live, and depending on where you are at, I view it as absolutely crucial that you sit down and know:
1. Where you are.
2. Where you are going.
3. What can happen along the way.
It's impossible to plan for everything of course. That's also not what I'm expecting anyone to do. However, basic things are possible for everyone. Have a 12-month plan for your life, and have a 5-year plan for your life. If it doesn't work out (and it likely won't, because life comes into this), that's not bad - it just means you adjust your plan.
However, knowing some of these basic things is really a sort of superpower. It means that things that happen to you, decisions you make/can make, all of them are weighted against these things. If you didn't have these things, you're essentially making decisions in a vacuum. I view this as dangerous.
This is not locking you into one mode of thinking, but rather making sure that the decisions you make actually line up with your overall plans and goals.
Planning goes into everything. For some of you, this might not even be a concern, and people who plan and for whom this is a natural process tend to be surprised that some do not.
I've seen so many issues and downfalls that could have been prevented had people planned more, set more realistic goals, and had the foresight to plan for negative events.
The point really is, start making plans, and be sure that you're always working towards goals.
(Source: Unsplash)
6. Generosity & Lack of Respect for money
Another problem I've seen way too often, especially when it comes to people in the higher age demographic, is excessive generosity with their money to a degree where they essentially put themselves and their own financial well-being in danger.
If you give away your money, it's gone. That's it. I've only had one person who actually inherited his fortune - this was his one big problem. Every single person I've had who made their own fortune hasn't had this problem, because they usually know what it took to get them where they are - which means that they're not distributing things around freely.
If you're not used to working hard to get money, it's a danger in that you may not value money the same way that those that do work do.
Because let's be real - once people know you have money, there will be some people who come to you for that reason alone. I personally have a somewhat unusual way to handle this, because most people say that advertising your financial wealth is detrimental. I do just that - and the way people act or react forms my basic opinion of them. This is not the way for everyone, but it's a way that's worked for me. It's saved me both personal and professional grief, and it's saved me from making some very poor investments - both in terms of time, money, and social connections.
Look - getting rich is brutal.
Staying rich isn't as brutal with some foresight, but it's still very hard. There's no reason for you to compound that challenge by being someone who devalues his/her own value by giving away the fruits of your own hard work. This is not me saying "don't help people" or don't help your family - do whatever you like.
But be responsible for how you handle your money.
Remember what it took for you to get there.
(Source: Unsplash)
7. Lack of Patience/Wanting to get rich quickly
If you've already reached a certain level of wealth, you'll probably have some sort of defense against this - but let me tell you a story. A friend of a friend [of mine] worked as an antique dealer. He would work hard and long hours to build his fortune up from zero, buying very cheap and selling very expensive. Small stuff, but still netting profits of 200-500%, which is very respectable for that industry where he was active.
Then he reached a certain level of around $100k-$200k, and someone offered him the opportunity to buy a piece, a watch, that he knew would sell for 3-4 times that value on Sotheby's/Christie's.
He checked everything out as well as he could, and everything seemed to check out. He even had 30 minutes alone with the watch - so he bought it.
Well, the watch was a fake - an extremely good fake, but still a fake. Due to legal complexities, he didn't get his money back, and he had to start from zero.
A lack of patience can ruin you. Wanting to get rich quickly without putting in the work can ruin you. Can you get rich quickly? Of course, you can. But for every single person that turned $10,000 into $1M in less than 1-2 years, you can be one of the 1,000 people who turned $10,000 into $100 or zero.
Patience, I've found, is the real miracle and differentiator on the market - and I've only been into it for 10 years at this point. Patience will make you a millionaire and more if you allow it to.
(Source: Unsplash)
If there's anything I've seen that has ruined younger investors - particularly those without all that much capital, less than $10,000, it's a lack of patience. They believe the only way they can make it big is by turning that $10k into $1M fast. So they bought crypto - or tech stocks, or other types of investments. For 99% or more of these people, that turned out to be a horror show.
When you start investing in things because you need "more money/more growth now", that's when things can really turn south. Investments should never be predicated, as I see it, on growth rates of triple or quadruple digits in a short time. Any time you start looking at those types of investments, you need to consider business failure rates at those stages of company development.
Typically, most businesses fail early on, and there's an indicator of risk when you're looking at growth rates like that.
8. Over-leveraging
Over-leveraging is the use of credit to a degree where it becomes a hindrance or even a poison to your finances.
Credit, mortgages, margin - different types of debt. It's all a part of it.
(Source: Unsplash)
I'm not averse to debt at all, and I'm probably one of the few investors that will come out and say so to beginners, for a few reasons.
First, I'm Swedish. What that means is that I can get margin, up to a 1.45x leverage, on my portfolio, for an interest rate of 0.69% as a preferred banking customer. I also get a 0.79% mortgage and 90-day interest-free credit on my cards. For me, unlike in many other nations, credit is actually extremely cheap, and not just compared to anything, but cheap overall. That sort of interest rate means that even conservative investments have a yield spread of over 3-4% to this interest rate on dividend alone.
Second, I really believe that by not using debt for things like a mortgage, or even margin, you're tying one of your hands behind your back.
Third, I really believe you need a debt strategy to handle leveraging or credit. As long as you have this, I don't see a problem with it, provided that it works for you.
I view it like this. This is not my comparison, but I can't recall where I read it.
(Source: Unsplash)
Debt is like fire. If you manage it well if you keep it under control, feed it carefully and keep an eye on it, it can warm you up and make you safe and comfortable for a long time. You're an adult, and I hope that as an investor, you at least have a basic understanding of debt and how it can work.
(Source: Unsplash)
If you however let it get out of control, that's deadly.
I know people that work with a 200-300% margin. I would never, and I repeat, never, do this, even at my interest rate or any interest rate. I don't care about the terms, I would never over-leverage myself.
Here are my personal rules for debt/credit.
1. Never more than an LTV ratio to your net worth of 30%, of which 15% must be tied to hard assets, like a house or a condo.
2. No more than a 1.2x margin on your portfolio, meaning 20% of your portfolio value. This has a personal reason because it means that my portfolio can drop 50-60% in value before my interest rate gets bumped to the next level - around 1.6% (at 1.45-1.5x)
3. Mortgages need to be 35% paid down or more - preferably 40%.
4. Never use debt/credit cards to purchase consumer goods/luxuries that you don't pay down by the end of the interest-free period - ever.
Debt isn't easy - but if you're reading this, it's likely that you're somehow managing your own investments. If you do, it's important that you understand and/or learn about things like how debt works.
But it does come with a risk that needs to be very well understood.
Wrapping up
These are the eight typical reasons why I see people who have money, lose money or reasons why people never even achieve financial freedom in the first place.
For many people, these are harsh lessons to learn, and it takes them years to do so - especially at a young age. 10 years ago, I didn't adhere to most of these lessons, if you want to call them that. It was a mixture of hard life lessons and realizations that aligned me more to these realities.
A big part of why I see people not getting richer, or rich in the first place, is not because they don't make enough money. Many of the people I meet in fact make more money than I do. It's not because they don't invest - they do. It's because one of these aforementioned failings, if bad enough, can really cripple you massively from a financial perspective. It can even drive you bankrupt.
I think most people here would agree that it's important to avoid this sort of problem. And so, things like this which can seem no-nonsense and super-obvious to many of us, still carry value for all of us.
For those unfamiliar with them, they're powerful tools and rules to structure your life and your finances around.
For those familiar with them, they serve as excellent reminders. A back to the basics, if you will, which is as important to everyone. It doesn't matter if you're a billionaire or just starting out - back to the basics always serves a purpose, no matter where you are.
If you use these principles and rules when you're constructing your investment portfolio and your life, I believe they will do great things in catapulting you towards your success and freedom - whatever your definition of that may be.
What are some of the ways you have seen people reach a financial ruin, and what has it taught you in terms of strategy? Let me know in the comments!
Thank you for reading.
Notable comments
stoney500
Good article! One thing I would add is to always make sure you have sufficient insurance coverage (medical, home, auto, etc.) One catastrophic event you are not covered for can erase a lifetime of earnings.
Jslecho @stoney500 I would add getting a long-term care policy before age 60. I waited and underwriting thinks I'm beyond my expiration date now. Hybrid LTC (non-standard) is 2x ++ more expensive per month. Good news is most men die within 18 months, on average, after entering a nursing home. I figure I only need about $150k saved up for that. Alzheimer's is the worst, you can live for years and drain every dime of savings you hoped your spouse would get.
D. Rider
I can only say this as someone whose been in the markets since 1975:
---if you do not view "time" itself as the most valuable thing you own, then let someone else handle your investments. You and your (future) family and children will be better off for it.
To squander time, repeatedly, negligently and willingly (usually through day/swing-trading so much and just generally getting in your own way all the time) will leave you in a position later in life where massive regret and substantially lower financial wealth will haunt you.
And understand you can never, ever recover and/or make up for squandering that most valuable thing.
What you do now, how you behave now, will dictate where your station is later in life. If you're able to read these words, you're on the road to winning half the battle. To win the battle fully, you must buckle down, sacrifice, and adhere to being disciplined while understanding there are no shortcuts. And don't ever, ever believe that there are.
The best of fortune to all you and all of us.
Tobias Lehigh Nagy
With all due respect, a million $ isn’t what it used to be.
hawkeyec
This is a very sensible, straight-forward guidebook for those seeking to acquire and keep wealth. Thanks for taking the time to write it. I taught finance, real estate, entrepreneurship, and strategic management for 40 years and have helped many of my students to become rich. I have also had some friends who kissed rock bottom hard. Even my own parents lost nearly everything (eight figures worth) by hiring a bad money manager (a big one you'll have heard of). As I read this a couple of observations came to mind. I'll start with a piece of advice that many who read this will scoff at. Skip the rental property. It will give you headaches you don't want. I got a call from a colleague one day who told me he heard I knew about real estate (started our school's RE minor and published a text) and he asked me if I would be interested in getting some nice properties. He had three newish duplexes he had built and offered them to me for a great price. I told him I didn't have any spare cash at the moment. He said he didn't want me to pay him, he wants to pay me 10k each to take these "winners" (and their mortgages) off his hands. My very rich investment mentor (one of my grad school profs) actually founded and owned one of the very first REITs in the US. It had over 100 properties in it, worth a solid nine figures and he did fine. He sold preferred stock to raise cash. In fact, he became my landlord toward the end of my time at school. A student of mine I helped acquired 50 or so properties and did some development. But eventually, maintenance costs, keeping good tenants in, and kicking bad ones out becomes a major nuisance and you are likely to hate these things. Buy some good REIT stocks and enjoy the asset class vicariously like I do (if you can do that in Sweden). Also, REIT stocks are liquid, properties are not.
A couple other thoughts. First, I agree it's hard to get rich and easy to become impatient along the way. Once you get there (23 years ago for my first mil) you don't realize the main thing you point out here. You can still screw up and lose it all. Soon, however, you begin to find that you have this new problem. If you are successful you will make money and you will begin facing a growing amount of work reinvesting your earnings. If you spend all your distribution cash, you destroy your total return compounding. The opportunity cost of spending all your earnings can easily be the loss of 50% of your prospective future wealth (I also wrote an investment text). All the time my wife and I were building our wealth, we reinvested at least 90% of all our investment earnings annually, and generally, we saved all of it. This is essential if you want to have something to spend later when your paycheck is gone. There will be unforeseen things that go bump in the night. It turns out that my wife had early-onset Alzheimer's disease (for 18 years). The total cost of her care came in at $730k. Nearly six million people are currently coping with this horrible surprise.
However, if you navigate the waters of acquiring and keeping wealth, and you are conservative, like you and I are, you will probably have adopted a lifestyle to match so you probably won't spend what you've got. One thing you didn't mention is charitable giving. Heaven knows there are plenty who need some help. Last year, including matching funds, I paid for 100,000 meals. More this year. I have donated twenty-five percent of my income to the charity for the last seven years yet my net worth has still risen every year. In fact, at this point, my wife and I have given away the equivalent of every dollar the two of us made for the first 25 years of our lives together without seeing our net worth fall.
One final issue, as one's wealth grows, the problem you least expect is finding good stuff to buy with your reinvestment capital. You can't chase winners because that ruins your basis and lowers future total returns. I have MMM at less than $20, LLY at $35, WFC at $8, TXN at 35, etc. I can't buy more of that stuff, too expensive. So I have to look for new things. In my case that includes 50 CEFs, a bunch of BDCs, a bunch of REITs, preferred stocks, and other things. But as you suggest, at this stage it is critical not to get stupid, the ever-present pandemic facing the senior citizen. I operate on the efficient frontier, make a very decent yield, and keep my beta compared to the S&P at a constant ~0.5. I never beat the market and I don't care.
I hope you get lots of reads on this piece. There will undoubtedly be scoffers but everything you said was gold.
T25D52 @hawkeyec "You can't chase winners because that ruins your basis and lowers future total returns. I have MMM at less than $20, LLY at $35, WFC at $8, TXN at 35, etc. I can't buy more of that stuff, too expensive. So I have to look for new things. In my case that includes 50 CEFs, a bunch of BDCs, a bunch of REITs, preferred stocks, and other things." >>> No idea how the thinking or approach outlined above makes any sense.
engraved
I know of two cases, where $$ was lost very quickly, by a couple people that didn't have a clue about investing.
1. My sister in law, only child whose parents owned a beautiful resort. Parents passed away and resort was sold, with my sister in law inheriting the proceeds, which was about a million in todays dollars. When I talked to her, she said she had a lot of money put into silver futures, which she lost, and a even worse investment her girl friends boyfriend got her to give him money to buy a home in NY, at a good rate of interest. Proper paper work wasn't done, he disappeared along with the rest of her money, which took about a year from the time of the inheritance, and she was broke.
2. My wife's friend sold her home and netted about 200K. She answered a ad, in the local newspaper, offering a good rate of interest. Lost all of her money, and the person that had the ad, is now in prison.
ALLDAY1 @bengraved We must remember if it is to good to be true , it probably is not that good.
We see it all the time the internet is full of the scammers , especially old people like me. I get notes telling me that my account at Capital One is blocked because of illegal activity ..Well I don't have an account at Capital One so block away ..Or one telling me my Soc. Sec is blocked ...little secret they cannot block Soc.Sec accounts. You see it's an easy scam and they only need 1 in 50 to fall for it and it happens especially when one is worried about having enough to live on. We all should know , but unfortunately some don't.
GREQVI
Great article, loved all points. Congrats on the million-dollar achievement
"I've seen a colleague and an old boss of mine, as recently as 3 months ago, go from a $5M-$10M net worth, to essentially zero and bankruptcy, which was a very sobering experience and taught me what not to do."
Really intrigued/curious as to how he did that. Could you explain a bit?
Wolf Report A big part of his failure was being "used" to a certain lifestyle combined with being used to not investing his cash into things that actually grew compounded, as opposed to an interest account.
He was extremely successful in his field, lived in a massive, 400 sqm villa with his new wife and 8 kids. The sort of guy who paid $2000 for leasing a massive, tropical water aquarium with expensive fish.
Then his business slowly started dying down, and he kept living and doing what he was used to do[ing] while having [spending?] seven figures each year. The cars, the vacations, the outings, the food, all of the luxuries I viewed as "frivolous", but he viewed as "normal". His father was one of the richest people in an entire state in Sweden, so he grew up being used to that.
It took 2-3 years, but the combination of taxation, recurring expenses, and investing in poor alternatives as well as doing some questionable things in terms of taxes (and eventual back taxes and trouble with the IRS), wiped him out, all the while he continued to finance the same lifestyle, but this time with credit cards, corporate loans, and private loans.
That was really his eventual downfall.
GREQVI @Wolf Report Damn. A small leak can sink a huge boat, and it seems like he had financial leaks all over his boat. Keeping your spending under control and being able to reduce it is crucial
Robert 7809591
If everyone followed your advice the American economy would go into a deep recession. Spending beyond your means is as American as apple pie. Excuse me. I have to go spend my 1400 dollars that Uncle Sam put on the taxpayers' credit card.
:))
The Social Scientist.
He left out - don't get divorced. So don't fool around.
Wolf Report
That's a good point, but my personal advice on that point is:
1. Iron-clad prenup.
2. Don't get married.
I follow #2, and if I marry, I intend to follow #1.
:))
Paul01x
Good advise. I have found the combination of working your tail off to increase your income and living well beneath your means so that a large fraction of your income is available for investments is a good formula for financial success. You can do this and still enjoy your life if you spend your money wisely and in moderation. If you want to travel to Europe, rather than staying in the city and pay $400+/night for a small, noisy room, you can often get a nicer room in a better hotel just outside the city for $150/night (perhaps even less). As long as you have easy access to the city, this works well.
IMHO, debt of ANY kind adds considerable risk to your financial security. Always pay cash for depreciating assets such as a car, always pay your credit cards in full every month, and pay off your mortgage as quickly as possible; even if your home loan has a low interest rate. A black swan event can ruin even the best-laid plans, and you don't want to lose all of your home equity in a foreclosure. Ideally, when you buy a home, your net worth is larger than the purchase price of the house if you decide to get a mortgage initially. If the house costs you $500K and you have a net worth of $900K, you're in a much sounder financial position to take on a mortgage.
cdockman
I am one of two persons in an informal investing partnership. The best advice I could lay on top of the Wolf Report is Invest in Companies, not Stocks. The article mentions not to become emotionally attached to stocks. Great advice. Icing on the cake of stock selection is knowledge of the company, financial structure, management, the industry, the technology or lack of it in the company and the industry, status of current and future competition, and several other factors. Bottom line is that a Huge Amount of Research is required to do this. If you find one or more industries interesting, then Research can be rewarding in more than one way.
bagholder1
@Wolf Report thanks for these important reminders! One thing that I have always felt is that it is more valuable to live cheaply than to live extravagantly. If you know how to fix things you have that knowledge and you have solved problems. Throwing money at problems isn't a learning experience and has less value to me. It seldom costs more to do it yourself but even then you have learned (and lived). DIY!
My father inherited shares in Wachovia Bank. I advised him to go to the Fidelity store and sell the shares and buy a mutual fund.
He didn’t, and lost $600,000 in 2008. He worked past 80 to make up for the loss.
I have a strategy to get females to stop begging me for money; I keep a low bank balance. “I’m sorry, but it will take several days for me to get money from my investments into my bank account.”
I told my friend that the word that has helped me get rich is “No”.
Many men are afraid to say it.
$500/month invested for 33 years is $1 million. It’s a decision to pay yourself $500 that requires discipline.
Dividend Digging Armadillo
Caller of Wolves,
My dad always said live below your means. For those of us whose parents lived during and through the Great Depression, they never wanted to re-experience Living to Exist, that is why they were high savers, as they never wanted to run out of money, or be dependent on others or the government. Thanks for sharing your experiences. Dividend Digging Armadillo. Baja Oklahoma
JPH1
And if I may add..never, ever forget to pay yourself first. Even if it's only the first dollar. Do that over a lifetime and it will make a difference.
vooch
NINETEEN THOUSAND FOR A VACATION ?????
My vacation strategy is to buy some income property in a reasonably okay location. Then, my tenants pay for my vacations :)
The hard realist @vooch - I thought the same, and I have taken some lavish vacations over the years with my wife and 2 kids the most expensive of which was half that. But remember the author is in Sweden and costs to get anywhere and vacations of 2-3 weeks are common for those folks.
vooch For $40k one can make a down payment on a modest place somewhere sunny, rent it out during the high season - and use if FREE for 30 weeks a year. Have some Summer People pay your mortgage. Free Vacations for Life
Wolf Report Exactly my thoughts. Currently looking at portugal - though for myself 6 months a year than anything rental!
Great resume of investment wisdom. I am 60 and I started to invest in stocks during my early 30s. In the beginning, it cost me a lot, since I was very conservative with my money and I did not know the stock markets. I read a lot and I started prudently. Now I have an aggressive but balanced portfolio, 75% on growth and tech and 25% on value, REITs, and cash, with no bonds since 2007. I never went on margin, so I never had to sell anything during bear markets (2000, 2007-09, and March 2020). Money invested in tech during bear markets is the backbone of my portfolio. I am up around 300% with many tech stocks, so when they fall 20% like over the last 2 months, I do not care and I hold them. I think the biggest mistake of today stock investors is not keeping a reserve of 25-30% in value or high-yielding stocks, REITs, and cash. That 25-30% will support and finance your portfolio, so you will be able to buy (and not sell) during down and bear markets.
kyle191
There was one point that was not mentioned to destroy people's wealth:
Keep funding your kids no matter what! I know several people who make a ton of income that have almost no net worth. The chief culprit? They spend too much money on their kids. $15,000 a year for travel soccer per kid. $20,000 per year per kid in private school (K-12). Their kids drive amazing cars at the tune of $2,000 per month for loans, gas, insurance, and maintenance.
One of the guys I know, his oldest kid is off to college this year...and of course, only the best education will do. After all, he already has over $250,000 getter her out of high school!!! A private university with annual tuition of just under $60,000 per year! By the time his oldest kid is 22, he will have already spent half a million dollars in her education!!!
And this guy has two kids!!!!! I'm sure I'll get flamed by the parents with the story "But education is the best investment you can make for your kids." But the reality is...not, to that extent it isn't. My friend will work until the day he dies.
bil4beta @kyle191 depends on how much money you have, it's relative
Whiterabbit66 @kyle191 I spent 60k a year on two kids' private schools. My dividends pay for it and it's money well spent. It's pretty typical these days to spend 500k per kid from 5 to 21. Still worth it if they go out and make 150k a year by 30. The problem is when people borrow for school, college, anything basically without a good RIO..............
SamHain31 All wasteful spending irks me, but the cars are the worst. I worked at mostly colleges, and the newest generation is idiotic with cars. Not only are they leasing, which is stupid enough, but they're also leasing premium cars, so they're repeatedly eating depreciation on what depreciates the worst.
Flame me if you want, but paying maximum taxes and insurance for the newest toy, plus eating $20,000 in depreciation every year is stupid. If you're so worried that an Audi will completely disintegrate after 3 years that you'll burn piles of cash to rent a new one, then maybe you should consider buying something used that isn't a pretty POS[?]. I've dated a pretty POS, and trust me when I say you wouldn't want a rolling one that costs even more. When you add up how much money you've spent leasing over 25 years instead of buying one Lexus and investing the savings: pics.onsizzle.com/...
These kids and their families make many times more income more than I ever made working, but my net worth is many times theirs, and they talk down to me for driving premium vehicles I paid for with a check.
Wolf Report @kyle191 Same as with divorces, I have no kids. I have friends who have 3 kids, so I know well what kids cost, but I have neither wife nor kids, which gives me quite a big blind spot, unfortunately.
A very good comment! Thanks for making it!
gristlenoggin @kyle191 Biggest job as a parent: turn your children into productive self supporting adults. I would suggest paying for everything for them is one way to make sure that doesn't happen.
june1234
And don't pop from subscription salesmen to subscription salesmen who proliferate these sites. Most of em don't follow their own recommendations just non stop posting articles to reel in newbies replace the last group of newbies who blew up their accounts or lost money following them rinse repeat
May I add my congrats as well upon achieving your financial goal.
Also, a sincere thank you for taking the time to share your wisdom and experience. And I concur with your advice. Have always believed that "winners", which you are by virtue of obtaining a substantial goal through hard work, should be magnanimous and help others...not necessarily financially, but through mentoring, serving, sharing their wisdom, etc.
At age 68, might I add a few nuggets?
One, as a retired (small-time) private equity fund manager, I've seen money do strange things to some people. Specifically, warp their sense of right and wrong and instill a sense of entitlement, to name a couple. In my case, I try as best one can to be intellectually honest about myself, how I treat people, my own monies, and to retain the moral compass instilled in me as a boy by good parents. Perhaps this will register with some, or, hopefully, most of your readers.
Two. Document in writing the terms and conditions of any business transaction, deal or partnership. True story. I started my business at age 35 with a partner. We were together 20 years. Half way, when raising our 2nd investment fund, we agreed to allow two, non-managing partners to own a piece of the business for raising the capital. They insisted that a "severance without cause" clause be added to our regulations. I objected to my partner on the grounds that I didn't want to work 6-8 years in a 10-year partnership, building millions of dollars of value for investors as well as ourselves, only to paid a year's severance pay to go away just as the fund was being harvested. My partner asked me not to rock the boat and allow the clause be inserted. That was because his vote would be needed to "vote me off the island" and he would never do so unless there was cause (i.e. some illegal activity on my part). Well, you guessed it. Some 6 years into the fund's life, the non-managing partners, without cause or any impropriety on my part, decided to terminate my employment and steal my equity ownership. When I asked my partner how he was going to vote, he said he was going to go along with them because they were very powerful men in the Dallas business community and he didn't want to make enemies of them. So ladies and gentlemen, I was voted off the island and told the firm was going to buyout my ownership (for less than 10 cents on the dollar). Fortunately, 6 years prior, I convinced my partner in that fateful conversation to allow me to add language to the regulations that any buyout would require a written request from the terminated employee that his ownership be purchased by the firm. Even that didn't stop their attempt and it was only after a 3-year legal battle costing $750,000 that a binding arbitration panel ruled in my favor. I retained my ownership, and the fruits thereof; still, the legal expense put a major dent into my retirement funds.
Third. Sometimes bad things happen to good people. Its called life. Do your best when it happens and don't lose hope or faith in always doing the right thing.
Quoting Spock, "live long and prosper".
Wolf Report Sobering advice. Thank you, sir, for sharing your wisdom, experience and your acumen with me, and other readers.
I currently manage 3 businesses that I own myself, and in one of them, I work with a partner. Everything we do is secured in writing, and while the legal framework of the Swedish system is much more lessaiz-faire than in the US, with legal costs less than 5-10% of the costs you're seeing, I'm still being extremely safe.
I have, however, learned the hard way never to allow any outside party to allow to negotiate contract terms in such manners as you describe. I had a consultant try and do the same to me, only for her to try and stab me in the back once I'd agreed to small adjustments in the contract. I managed to get out on top, terminated her, and no loss of faith or face with the client. Lesson learned - I will never allow ANYONE to renegotiate basic contract terms with me again - I'd rather walk from the contract.
Thank you again - I agree with everything you said.
Flex68
Congrat's to you on achieving such a financial milestone!
Very pertinent points, well-said.
I had family who grew up in The Great Depression, and I was taught the importance of frugality.
My financial situation has changed, positively, over the past 4 decades of work-life (most especially in the past few years), but I still am 'conservative' and don't live above my means.
Don't mind eating leftovers, and enjoying a restaurant meal is still a treat vs/ a norm; I drove my previous vehicle (bought used) for 14 years and have had my current vehicle (bought used) for 10 years; I still 'vacation' with an eye on resort savings, and 'book' during non-prime seasons; and etc, ad nauseam.
Still hope to retire by age 60, in less than 10 years, even though I started saving/investing ( with no background or education on same ) at a 'later' age than many peers.
Best wishes and regards to all
idahojoe
I think you might also consider spending some money on yourself occasionally. No need to spend $19,000 on Maui (very overpriced in my opinion). If you like the tropics and beaches try those in Southeast Asia. There are alternatives. A little spent on travel and holidays may curb the desire to splurge. I have seen countless people who saved all their life for a goal in old age that never was available because of poor health, loss of loved ones, etc. Also the same is true for saving for your children. I have witnessed many who passed an inheritance or business to their children only to find the children have "pissed" it away in short order. Enjoy your life; its later than you think.
Clauser1960 @idahojoe Singapore + Bali or Lombok and Bankok + Phuket
Aussie_Charles
Great read and very important points.
For me, it all started really once I was debt-free. That allowed me to start investing and fully agree with the diversification strategy.
Planning is very important, and honestly, something I should have paid more attention to earlier. I review my plan every quarter.
Any investor will make mistakes, the key is to make more good decisions than catastrophic ones. Greed is a big danger and risky.
jerryki
Wonderfully written. Even at higher interest rates in the U.S., vs. Sweden, I borrowed $200K on my residence on an equity line at 3% with essentially zero costs and flexibility to pay off any amount at any time. Easy to invest at a good spread (conceptually I'm using 9% [6% spread] resulting from solid dividend-growing stocks including a component from selling covered calls).
Buyandhold 2012
Getting rich is brutal?
No, getting rich is easy.
Staying poor is brutal.
All you have to do to get rich is to buy stocks with durable competitive advantages whenever they are attractively priced and then never sell them.
That's it. Easy peasy.
And staying rich is easy.
Just don't spend a lot of money.
Rather than spending a lot of money on junk that you don't need, spend a lot of money buying high-quality stocks with durable competitive advantages whenever they are attractively priced.
Dartz
Thanks, this was a nice read. Sad to say, I've personally made all eight of these mistakes. Fortunately, I made the mistakes early in life, learned from them and corrected my course.
What you are describing here are all investor behaviors that are detrimental to building and keeping wealth. Entrepreneurs are likely susceptible to these behaviors.
I think personal behavior management is a key investing skill, and it gets little attention, both in the world and here on SA.
Thanks for sharing.
srduke13
Nice job on the article. I am in agreement with just about all of your 8 lessons.
I am a 73-year-old man who has had to start over in my business because I expanded too quickly.
I started investing while in high school and the time management finally got to me. I started taking too much money out of my business and debt began to weigh me down. All the while I did not pay that attention to my portfolio.
At this time, I sold my business at a discount and now had to do a major revision of my portfolio. This lasted about eight years and finally had enough of a dividend stream to live on.
For the last 30 years, I have been able to choose where I wanted to work and retired at 58. I am living very comfortably on my dividend stream for my oldest portfolio as well as my 401c and Roth IRA.
My best to you for this and the articles you have written.
Duke
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