Financial mistakes often lead people to a life of major economic hardships.
“Money is a terrible master, but an excellent servant”
P.T.Barnum
It is wise to understand early on in life that effectively managing your wealth is the bedrock of many life goals.
Here is a quick list of some of the most common mistakes to avoid when managing your wealth.
1. Not Diversifying Enough
One of the most common mistakes that I see young people making while investing is being impatient and investing too heavily in a single asset class. For novice investors, it is recommended that they invest in diversified instruments such as ETFs, commodities, real estate and other alternative investments.
The simple rule of thumb is “don’t put all your eggs in one basket”.
2. Keeping Too Much Cash
For some people who might not be too financially saavy or might just be too busy with their careers to focus on wealth management, cash may feel like a “safe” option.
The reality is however quite different.
Inflation can erode the purchasing power of cash at a very alarming rate. While you will still have the need to keep at least a small portion of wealth in cash as an emergency fund, the majority has to be invested in balanced risk investments.
Too little of a risk might not fetch enough returns to stay above the inflation rate, while too much risk might lead to capital erosion from capital losses if things don’t pan out the way you want them to.
3. Failing To Get Time On Your Side
Compounding returns (returns on returns) is sometimes referred to as the eighth wonder of the world.
This is what they call making your money work for you, instead of you working for your money. Compounding will do the heavy lifting for you when it comes to increasing your wealth and the longer it happens, the more significantly wealthier you become.
This is why if you are just in your 20s, start investing even if it is just a few hundred dollars a month. At that age, you have time at your side and the real magic of compounding will kick in earlier than if you were to start investing at a later age.
4. Not Aligning Your Investment Strategy With Your Stage of Life
The older you become, the less riskier investments your portfolio should tilt towards. This is because at that age, it would be harder to recover from a capital loss.
If you are young and have got time on your side, you probably can take a few more risks with your portfolio.
However, at the end of the day, we should all be investing to maximise net returns while minimising risk.
5. Neglecting Tax Considerations
While tax evasion is a crime, tax planning on the other hand is not only legal but also one of the key pillars of managing wealth effectively.
This is neglected all too often simply for the reason that it is complicated topic and not many are well versed with it. DIY-investors without a wealth management expert on their side most often commit this fatal mistake.
Your investments and financial planning need to be aligned so that your tax allowances and tax reliefs are maximised. There are multiple ways you can avoid overpaying your taxes simply by following perfectly legitimate tax planning strategies.
It is important to remind yourself here that these tax savings can be compounded over time to give your investment portfolio a huge tax shelter. A good wealth management adviser will always have an eye on taxes saving you possibly millions of dollars.