We recently held a seminar titled “The Five Biggest Mistakes Affluent People Make” and due to popular request we decided to write a summary blog post on it. To keep it brief, I’ll run you through a question per mistake and at the end you can see where you end up:
1. There are more tax efficient donation methods, for both the donor and the charity, than simply donating cash:
Answer: TRUE, an example of a more efficient method would be donating investments with a capital gain directly to a charity (see our post on this CLICK HERE).
Mistake #1: Many individuals read about certain strategies and, although they may understand a strategy could benefit them, they shy away simply because it sounds too complex.
2. Having too much money in your RRSP will limit your retirement options:
Answer: TRUE, although it feels great when you receive your tax refund, choosing to invest in an RRSP versus a non-registered account isn’t always the best choice.
Mistake #2: As your situation changes so must you; many people contribute to their RRSP year after solely because it has become a habit.
3. You’ve just won $500,000 and need to pick an investment; assuming you only were given two options which one would you choose:
a. Investment A
i. Requirements to buy: Legal fees, appraisal fees, negotiation time
ii. Requirements to hold: Appraisal costs to know value, insurance coverage, you must be on call and ready to commit a few hours, at minimum, every month to help grow the investment
iii. Requirements to sell: Legal fees, 5% sale fee, 3-6 month time frame to receive cash
iv. Gross of fees Return: 5%
b. Investment B
i. Requirements to buy: None
ii. Requirements to hold: None
iii. Requirements to sell: None
iv. Net Return: 5%
Answer: B, you may have determined that investment A is an investment in real estate; see our post on real estate investing by CLICKING HERE.
Mistake #3: We judge the success of investments numerically therefore we must make investment choices based on numerical criteria rather than emotionally.
4. When you are making an investment decision you should:
a. Choose an investment that will grow, protect your initial deposit and meet your retirement needs
b. Choose the investment that will save you a little tax in the short term
Answer: B, although tax is sometimes an appropriate secondary investment consideration you should not make an investment decision for tax purposes.
Mistake #4: Investors become so focused on the instant gratification of saving tax and neglect to make the appropriate decision that will provide them substantially more future benefits.
5. If you read in the Wall Street Journal “Cannabis and Bitcoin are the can’t-miss investments of the future” should you:
a. Move 100% of your money into these two investments
b. Do nothing
Mistake #5: Have you ever heard of the fear of missing out, or as it more commonly put, FOMO? We tell our kids that they all have developed FOMO because of their need to be on social media 24/7, however, we have also developed a FOMO when it comes to fad investing. We need to be able to put on our blinders, sit tight, and trust that a global portfolio will, over time, produce our needed results.
Conclusion: We recently had about 20 people take this quiz at a wine and cheese night and almost everyone got every question correct. I am going to assume that you, the reader, also got all of these five questions correct as well… So what does that tell us?
Given that everyone knows these answers, we can venture to say that these mistakes are not due to a lack of knowledge, rather, they are all behavioural. Further, these mistakes can all be summed up in one big mistake which is as follows: the most common mistake affluent investors make is failing to overcome their own behavioural biases