I don’t often refer to other articles or blogs, but I recently read a well-written CNBC article about fifteen of Warren Buffet’s most regrettable investment mistakes. I can highly recommend the article; you can read it here.
Warren Buffet, also known as “The Oracle of Omaha” explains a number of his investment oversights, how he explained it to his shareholders, and how the mistake impacted his investment strategies, but one mistake stands out for me;
Buffet admits that the dumbest stock he ever bought was Berkshire Hathaway. He explained that he first invested in Berkshire Hathaway in 1962 when it was a failing textile company. He thought it would make a profit when managed more closely and he increased his shares.
The firm later on tried to make more money out of Buffet. A spiteful Buffett bought control of the company, fired the manager, and tried to keep the textile business running for another 20 years. Buffett estimated that this emotional decision cost him close to $200 billion. Buffet’s investment advice? Do not allow your emotions to influence financial decisions. Certainly, timeless investment advice if ever there was!
If we, like Buffet, are really honest with ourselves for a moment, we can all admit that we have been guilty of making financial mistakes at some point or another. As a Certified Financial Planner, I often caution investors and clients against poor investment and financial decisions. Part of my task is also to educate and mentor good financial decision making.
Having been involved in the independent financial advisory services industry for more than two decades I can honestly say that I have seen quite a range of financial planning mistakes. In this month’s blog post I share some of these most common mistakes and how best to avoid making them. Here are 5 common financial planning mistakes which can be overcome if managed more effectively:
SPENDING MORE THAN YOU EARN
I enjoy reading, and one of the most profound lessons on money came from a Charles Dickens novel named DavidCopperfield. In the novel, one of the characters, Mr Micawber, says the following:
‘My other piece of advice, Copperfield,’ said Mr. Micawber, ‘you know annual income twenty pounds, annual expenditure nineteen ninety-six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery”.
We can’t effectively work towards financial goals if we can’t keep our monthly expenses in check. Work according to a budget and spend your money wisely. Stay away from overdrafts, purchasing on credit or even worse making use of short-term loans to service existing debt.
Many people think this means not being able to own a beautiful home or nice things, but this is simply not true, spending your money wisely means that you save the money and purchase luxury goods once you have saved enough money to do so, in other words we have to learn to be patient when we cannot afford something right now.
As you near retirement age you also need to reduce your existing debt. Certain retirement benefits may also offer upfront lump sum payments which should be invested and not used for settling debt, paying for overseas trips or any other purpose, other than increasing your pension portfolio.
AGE EVENTUALLY CATCHES UP WITH ALL OF US
Albert Einstein once famously said “Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it”. In the long-term it’s clearly better to start working towards a financial plan, rather than waiting too long, and allow the compound interest to work towards your financial benefit.
But there is no need to be despondent if you haven’t been able to put together a financial plan yet. Higher living expenses, increased housing prices and tertiary education costs, means that finding your financial feet so to speak, does takes a bit longer than it did in earlier years.
Start with a written plan with realistic and achievable savings goals and compile a monthly budget to keep better track of how you spend your money. Stay true to your budget and learn to spend in a disciplined way. Starting sooner rather later remains your best choice.
HAVING NO FINANCIAL PLAN
Having no financial plan is akin to committing financial suicide with clear risks and dire consequences. A well-balanced financial plan makes provision for your daily financial needs (protecting you in case of death or disability) but also securing your long-term investments for retirement purposes. Your financial plan should aim to beat inflation and offer you a diversified portfolio inclusive of a range of asset classes.
A financial plan also considers your current circumstances, earnings and aims to meet your financial goals and realise your dreams. Your financial advisor should help you develop a plan, a target rate of return, and help you select investments and products with appropriate risk levels, to help you meet your goals.
Besides the importance of having a sound financial plan, you also need to meet with your financial planner at least once or twice a year to review how well your plan is tracking and if there have been any significant changes in your family or personal life. Things like a promotion, a new business, an expanding family or being retrenched can have a severe impact on your long-term sustainability if not discussed with your financial planner.
NOT MAKING PROVISIONS FOR YOURSELF
Families are often caught in what is known as the “sandwich phase”. This is where families experience both aging parents on the one end, and children who are becoming young adults on the other, present in the same family. Both these groups place tremendous financial strain on the core family who are sandwiched between these two poles.
While caring for your parents and your children are both acts of love, they can be financially draining on your monthly income and retirements savings. Resist the urge to draw on your savings! In the sandwich phase you are most likely to be in a C-suite executive position and your earnings are also in the top tiers. Be very watchful of how you go about spending your salary, performance bonusses, emoluments and any additional monies.
It will be a good idea to discuss retirement funds, retirement home and homebased care settings as well as making provisions for continuous healthcare for aging parents. These expenses can be excessive and suddenly place your finances under immense pressure.
Lastly, as your children move out the house and become more independent, you should take any additional funds and make it part of your financial plan. It is important that you continue to be prudent in your spending and that you have regular discussions with your financial planner. You may wish to unlock additional benefits by increasing your monthly contributions and possible downscaling your home and by purchasing a smaller home and selling additional vehicles or un-used holiday homes, timeshare and so forth.
POOR RISK MANAGEMENT
In this section, we are not referring to your own investment risk profile as such, but rather to the real risks which exist in the greater scheme of things. A financial plan which is not protected from external risks can potentially be completely wiped out and mean the loss of a life’s worth of savings in the blink of an eye. I am referring specifically to failing to make provisions for things like proper healthcare, personal liability insurance, or failing to procure all-encompassing medical aid, or even not having sufficient short-term cover and home insurance.
But is also extends to how you structure your estate and how you plan to manage and safeguard your loved ones against potential estate duty taxes and executor’s costs. One way of making sure one’s affairs are in order is to make sure you have an updated last will and testament and that your financial planner is always in possession of the latest copy. Make sure you have an updated I.C.O.D. (in case of death) file and that your family and financial planner knows where to find it. In this file you can, for example, place amongst other things the following documents:
• A copy of your last will and testament.
• Your living trust.
• Power of attorney.
• Life insurance policy.
• Birth certificate.
• Marriage license.
• Bank and credit card account details.
• Loan documents.
• Internet accounts and log-ins.
• Telephone numbers of financial planners, lawyers, family members etc.
An I.C.O.D. file can truly be a lifesaver for loved ones who have to deal with the death of a family member and will make it easier to have access to emergency funds, initiate any post-mortem actions required by law and current legislation, and to commence with burial arrangements.
IN CONCLUSION
What I appreciate and admire most of Warren Buffet (besides his investment wizardry), is his humanity and willingness to admit his mistakes. He makes no excuses, blames no one else, and face his investors head on. He acknowledges his active role in making the mistakes and he owns up to his responsibilities.
But there
is one other thing that Buffet is a master of – he learns from his mistakes.
I am almost willing to say that this is Buffet’s most prized character trait.
He always goes back and tries to understand what he did wrong, and then he
makes sure he never repeats those mistakes again.
We can all
take a lesson from Mr Buffet in this regard. Making financial planning mistakes
are inevitable, sometimes we will be able to avert a crisis and other times we
won’t. But we must always learn from our mistakes.
There is a
humorous saying that goes: “Some of us learn from other people’s mistakes –
and some of us have to be the other people”. Good financial planning and
investments is an ongoing cycle and process. If we think through our financial
decision and do a proper analysis and sense check our ideas with those we hold
in high regard, we are taking steps in the right direction.
Talk to
your financial advisor and do so regularly. Interact with your investment plan
and stay connected to your financial goals, dreams, and independence.