As you build and grow wealth throughout your life, you’ll learn so much about money, investing and yourself.
Here are some of the big money mistakes to avoid in your millionaire journey.
This article was written by a Financial Horse Contributor.
1. Relying on historical returns
A study of millionaires by global financial advisory deVere Group revealed that the biggest mistake they made was relying on historical returns.
The firm’s CEO Nigel Green says that the admission of reliance on historical returns shows that high-net-worth individuals are keen to avoid such mistakes again.
“With fundamental shifts in economies and the markets, the often-quoted industry phrase ‘past performance is not a reliable indicator of future performance’ has perhaps never rung more true than it does today,” he said.
2. Lack of diversification
Another big mistake that wealthy investors regret is a lack of diversification.
Most of us understand the rationale of ‘not putting all your eggs in one basket’.
However, many of us aren’t doing diversification well.
According Rall Capital Management, many investors mistakenly think their portfolios are diversified when, in fact, they aren’t.
- Owning several mutual funds and thinking the number of funds held makes them diversified.
Say you hold an fund, a large-cap growth fund, a large-cap value fund and a dividend-growth fund. You may think these four different funds provide good diversification, but they don’t.
If you looked at the stocks held in each of those funds, you would find they are all invested in the same asset class: large U.S. companies.
- Owning an S&P 500 fund and a bond index fund and thinking you have a good mix of stocks and bonds.
This example is better than the first one, but the mix is still not providing good diversification benefits.
The S&P 500 fund provides exposure to the 500 largest companies in the U.S., but none of the 2,500 or so other publicly traded U.S. companies. There’s also no exposure to international stocks or bonds.
Instead, in the pursuit of diversification, invest globally in a good geographic mix and across asset classes.
The goal is to maximize returns by lowering the odds of a major market event having a devastating effect on an entire portfolio.
3. Being held back by fear
Another big mistake to becoming wealthy is being held back by fear.
Because of fear, you do nothing.
Inaction is not just staying stagnant, it’s actually going backward.
If you just put money into your bank account, your money will actually get smaller because inflation erodes your savings.
Get over fear by getting educated.
Know your money inside-and-out, understand the specifics of your incomings & outgoings.
Understand how investing works, expand your knowledgable to gain confidence.
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4. Not understanding taxes
If there’s anything that millionaires care about, it’s taxes.
Earning money is one side of the coin, and taxes is the other side of the coin.
As an employee, you should know the tax reliefs and deductions you are entitled to.
As a business owner, it is incredibly important to understand your taxes.
Once you reach a certain scale, tax planning is a not a place where you should be saving money.
Hire an accountant to optimize your taxes, and this will pay for itself many times over.
5. Not investing in yourself
The biggest asset you have is yourself.
The quickest way to double your income is to invest in yourself.
Invest in your mind, body & soul.
Enrich your mind with books (check out the best investing books for Singapore investors).
Keep your body fit and healthy.
Nourish your soul with meditation and mindfulness.
6. Falling for get-rich-quick schemes
Ever wondered why lottery winners and celebrities seem to lose their money so quick?
Whenever someone comes into a sum of money, if they are not equipped to “hold” money, they will lose it.
This goes back to having the right mindset for money, knowledge on how to grow money, and being able to be rational.
If you believe that money is evil or you don’t deserve money, you will find ways to get rid of it.
If you don’t understand how to grow money, your money will always remain small.
If you are greedy, you will fall easily to people offering you “business” proposals or “investment” schemes.
Going back to #5, if you invest in yourself, you will be equipped with the mindset and strategy to hold and grow your money.
7. Not stopping to smell the roses
Wealth building is a lifetime journey.
It is just as important to appreciate the journey, as the end result.
If you don’t enjoy the journey, this means you’ll be miserable for decades of your life.
And if Wall Street is any indicator, if you simply chase money, you’ll never be satisfied.
Appreciate the now, appreciate each and every step, and the entire journey will be fulfilling and worth it.