The holiday of Tisha B’Av is the saddest day on the Jewish calendar, commemorating five calamities that befell the Jewish people, the most notable of which was the destruction of the Bais HaMikdash. As this article should come out right before Tisha B’Av, let’s discuss the apt theme of “destruction.”
In my professional life, I have noticed a different type of destruction. I have seen families sabotage themselves and decimate their wealth. Most often this was caused by one or more of the following six financial errors. Understanding these wealth killers will help readers be better equipped to avoid missteps when managing their personal finances.
- Onerous debt: Debt is bad. Sure, it can be useful in some aspects of life, but borrowing too much money will leave families in a vulnerable position and make the accumulation of wealth nearly impossible. It’s worth noting that not all debt is created equal with some being worse than others. Let’s look at some common examples:
Home mortgage: Taking out a mortgage, at a reasonable, fixed interest rate, to cover the remaining 50%-80% of a home purchase may be prudent. Over time, a family will build equity in their home and be able to sell it decades down the road to help fund their retirement. However, oftentimes folks overextend themselves on their home purchase. Using borrowed funds to purchase too much house will be a strain on your financial life.
Automobiles: Housing is not the only area where families borrow too much money. It is also common when it comes to purchasing automobiles. Unlike a house, that should appreciate over time, cars depreciate over time. Borrowing too much money to purchase a vehicle is imprudent and an unnecessary burden on one’s cash flow. Buying or leasing a less expensive car will allow families to direct more of their income to pay for daily expenses or add to their savings.
Student loans: Loans used to finance a higher education do not always make sense. In fact, this seemingly responsible decision as a teenager can derail the rest of one’s financial life. It’s best to view your higher education as an investment. If you won’t be on better financial footing after college than before you went, then forgoing student loans is sensible.
Credit card debt: There is no debt more destructive to building wealth than credit card debt. With the average interest rate on credit card debt at around 30%, even a slight misstep can be disastrous. If you are unable, or not responsible enough, to pay your balance in full every month, then credit cards should be avoided completely.
- Keeping up with the Joneses: Inflating one’s lifestyle to keep up with your social circle is one of the worst mistakes people make. At all levels of wealth, there will always be someone who has more than you. Trying to keep up will only lead to heartache and financial pressure, and can lead even the wealthiest people to spend their money into oblivion. While this mentality is prevalent across all societies and geographies, there are certain communities where it is more prevalent than others. My best advice for investors on this point is not to get stuck in this rat race! Surround yourself with people who derive joy from other aspects of life beyond materialism to eliminate the feeling of constantly needing to keep up with friends in your community.
- Inflation: Inflation can be defined as the rate at which prices increase over time. The inability to grow one’s wealth beyond inflation leads to the loss of purchasing power. A family can save most of their income every year, but if they don’t invest it to grow above the rate of inflation by using stocks, they will just end up poorer in the future.
A common problem in today’s landscape is folks failing to invest their funds properly. With interest rates on money market funds, savings accounts, and CDs at a two-decade high, those more “conservative” investments are providing a false sense of security. In reality, none of those vehicles will allow investors to achieve their long-term goals. The Federal Reserve will eventually cut rates and those products will not be able to keep pace with inflation. Waiting until after rates are lowered to alter your portfolio to invest more heavily in stocks will just lead to missing out on the growth in the market.
- Concentrated investments: When the markets are good, everyone is riding high, and certain risks are not apparent. It’s common for people to pile into popular stocks or the frenzy of the day like SPACs or cryptocurrency. However, all asset classes go through cycles, and making too large of a bet on any one area of the market can wipe out a family’s wealth.
There is no better example of this form of wealth destruction than during the financial crisis in 2007-2009. I knew of family friends who spent their entire career working at a company, accumulating stock in that company, and having most of their net worth tied up in a single company. The unfortunate ones, who were in companies like Lehman Brothers, General Motors, or Merrill Lynch, got totally wiped out a few years before retirement.
The risks of concentrating one’s investments are not limited to instances during the Great Financial Crisis. Many people had concentrated positions in Boeing, General Electric, and Enron. Each one of these companies has its own story of how they disseminated investors’ wealth. The important thing to keep in mind to avoid this type of calamity is to always stay diversified.
- Not having an investment strategy: Not having a plan in place to manage your money makes folks far more susceptible to mistakes. It is akin to someone who goes to the gym without a program in place to get healthy. This gym-goer ends up watching and copying what others are doing, which is not a disciplined or effective strategy and may lead to injury.
Similarly, not having an investment plan leads investors to take investment advice from friends and family who don’t fully understand their financial situation or don’t know what they’re talking about. It also leads to speculation and no framework for how to invest incoming cash flow.
One of the most important aspects of building wealth is avoiding mistakes. Having a disciplined plan in place will help investors avoid these costly errors.
- Impatience: The concept of “impatience” is not likely found on anyone’s short list of top destroyers of wealth. However, after being in this business for nearly 20 years, I can attest to the fact that it is one of the most financially devastating mistakes. An investor can do all the right things, have a plan in place, and have the best of intentions, but if they can’t stick with their program, all their planning will be for naught.
Over the short-term, the markets tend to make people nervous. However, they reward over the long-term with significant growth. Experiencing years of shvach performance can be very discouraging and may cause people to patschke with their portfolio or search for other opportunities that they think will perform better. Sadly, impatiently bailing on your strategy before it had a chance to play out has cost many investors vast sums of money.
Over a long-time horizon, a diversified portfolio of plain vanilla stocks, bonds, and cash that is rebalanced when necessary and added to regularly, will likely outperform any other more exciting strategy. The key to being successful with this tried-and-true approach is patience.
The Talmud states that the Second Temple was destroyed due to “sinat chinam,” or senseless hatred of one Jew for another. The cause of this hatred can be speculated, but my guess is much of it boiled down to lack of patience with others of differing beliefs. During this time of year, it’s important to make the effort to exercise patience in all aspects of our lives. Not only will it help us achieve financial success, but it will also allow us to respect each other, regardless of differences. This is the ultimate lesson of Tisha B’Av.
May all of Klal Yisrael merit experiencing the next Tisha B’Av as a joyous celebration with the rebuilding of the Bait HaMkikdash in Jerusalem! Amen!
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