Top 10 Mistakes that Can Destroy Your Wealth
When it comes to protecting wealth, most people think that stock market crashes can be the biggest factor contributing to the destruction of their wealth. While this may be true in some cases, based on my experience in providing financial advisory services to affluent business owners and retirees since 1991, the list of factors contributing to destruction of wealth is more extensive and there are some that are not on the radar screen of most people who have painstakingly amassed their family wealth over the years.
HERE IS THE list of the top 10 mistakes you should avoid in order to protect your wealth:
1.Not Having an Integrated Financial Plan:
Would you build a house without a blueprint and a clear end in mind as to what the final product should look like? Would you start building rooms here and there and have no one supervise the planning? Unfortunately this is the approach that most people take to their wealth. They do things piecemeal and buy different financial products that are not coordinated with a clear vision of their financial future in mind and they have no one in charge of making sure their plan is coherent and gets implemented properly. The result is that they end up paying too much tax, do not have clear priorities, lack a coordinated plan and miss opportunities for leveraging wealth building strategies available to them.
2. Choosing a Professional Advisor for the Wrong Reasons:
This can happen in terms of hiring a professional in various disciplines. Choosing a lawyer, accountant, or financial advisor because they are your golf buddy, relative, or contact at the board of trade is a very common example. It often means that you will compromise on choosing the right specialist for your situation because you have good rapport with a person, or feel obligated to deal with a family member or friend. If it ends up being the wrong match, you will neither do yourself or them a favour by working with them. So stick with the right criteria in choosing your professional advisors. Choosing a professional advisor that does
not specialize in your situation is like going to the wrong specialist to seek medical advice. The doctor may be a great authority in his/her specialty and be very personable and professional but they would not have the specialized knowledge that you need for your situation.
3. Uncomfortable Risk Levels:
Most people think they have a higher tolerance for risk than they actually do. It is important that you be honest with yourself and only take on risks that you can comfortably afford and withstand. This will ensure that you will not pull out of a deal or sell your property or stocks at the wrong time and at a permanent loss and will be able to hold on to your positions until the time is right to sell.
4. Not Creditor Proofing Your Wealth:
This is especially important for business owners. Leaving your assets open to the claims of creditors is a big mistake and can be avoided using a variety of strategies, ranging from buying assets in the name of your spouse, family trust or holding company, to choosing the right beneficiary designations, and having your accounts set up at financial institutions that would help creditor proof your investments.
5. Getting Greedy or Fearful:
Greed and fear are the biggest drivers for financial decisions that most people make. Taking emotions out of investing and making decisions based on logic rather than following the crowd, can often result in choosing the right time to buy or sell, rather than buying high and selling low.
6. Having the Wrong Kind or Too Much Debt:
While the right kind of debt – the kind that allows you to leverage your assets and build wealth like taking a mortgage to buy a property or a business loan to grow your business – can greatly contribute to building wealth, the wrong kind of debt (borrowing to buy consumer goods, go on vacation, or maintain a certain lifestyle) can easily get out of hand and balloon into proportions that would be hard to handle and end up destroying your wealth and consuming your savings. Even with good debt, you have to be careful not to take on too much and make sure that you would be able to handle the debt even in the event of a substantial rise in interest rates or temporary job loss or dip in the revenue of
7. Paying Too Much Tax:
While taxes contribute to the maintenance of an advanced civil society and are absolutely necessary, not using available strategies to reduce your taxes can significantly decrease the return on your investments and hinder the growth of your wealth. The top marginal tax bracket in Ontario on interest income and salary is over 49.53% (on income over $220,000), whereas income from eligible dividends is taxed at 33.82 % and capital gains income is taxed at 24.77%. Proper tax planning can significantly enhance your after tax returns and allow you to take the most advantage of compound growth of your investments.
8. No Exit Strategy:
Most business owners can grow their business with the help of good partners. Joint ventures could be a good way of leveraging resources of different investors to achieve greater ends too. However, many partnerships that start well do not always end y well. Having an exit strategy ensures that you can rescue your investment if things do not work out as expected. By having a formal agreement at the beginning of a partnership when the relationship is great, and stipulating the conditions under which shareholders can buy and sell their shares in the event of exiting the business, retirement, disability, and death, you can protect your interests and save yourself a headache if and when the relationship starts to fall apart.
9. Not Diversifying:
History has shown that the best businesses can go bankrupt, and the best laid plans can fall apart. During the 1990s Nortel Networks was the darling of Canadian investors and we all remember how that story ended. Employees of Nortel who had their pension plan with the company as well as stock options that made up a big part of their retirement savings ended up losing a major part of their wealth when the company ended up declaring bankruptcy in January 2009. The best way you can protect your wealth is by diversifying your investments from an industry, geographic, style, and management perspective and ensuring you do not put all your eggs in one basket, no matter how attractive that basket may look at the time.
10. Lack of Liquidity:
You may have done a great job accumulating wealth but if all of your assets are tied up in real estate or in your business, and you do not have enough liquid cash to pay for unexpected emergencies or to cover unforeseen events, then you will have to resort to selling assets at the wrong time or borrowing money at exorbitantly high interest rates. The better alternative would be to make sure that you
always have enough liquid assets or access to a line of credit at low interest rates to be able to weather tough times.
Tina Tehranchian is a Senior Financial Planner and Branch Manager at Assante Capital Management Ltd. and can be reached at (905) 707-5220 or through her website at www.tinatehranchian.com