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MAY 16, 2022



This article appeared in May at Forbes. Click here for the full article.

Money management can be complex, and in the world of financial advising, professionals may encounter many clients who have a difficult time understanding comprehensive strategies for building their personal wealth. There are a lot of misconceptions surrounding the concept of growing a portfolio, with many investors missing important strategies or locking into singular ideas, such as “it takes money to make money” or “investing in one asset is better than diversifying.”

When consulting with a client about their savings, it’s important for a financial advisor to understand where they may need elaboration, where they may be misguided and where they may need to be convinced. Below, 15 members of Forbes Finance Council discuss common missteps financial clients often make and the information they share to help them get back on course.

1. Waiting To Start Saving

The misconception of the value of time is a common theme among clients. The belief that they can start to save for retirement “later” leaves the advantage of compounded interest and stock market returns on the table. A holistic personal wealth plan requires long-term planning and commitment, and periodic reviews are needed to refine your planning as needed. Time is wealth, and it needs to be utilized! - Geanette Rodriguez-Ojeda, Prestige Finance LLC

2. Not Engaging In Proactive Estate Planning

Many clients don’t understand the impact that fees and taxes can have on building wealth and passing it on to the next generation. I advise them to start proactive estate planning, which leads to more efficient structuring, with trusts, family partnerships and charitable trust vehicles to optimize the funds available to their family members and favorite charitable beneficiaries. - Jeff Call, Bennett Thrasher

3. Focusing On One Asset Instead Of Diversifying

Many investors get excited about making an investment in a single asset—usually a high-risk asset such as crypto. I always recommend diversification and assets that are forced to appreciate from the Fed’s printing press. This is a slow way to grow wealth, but it’s a near-guaranteed successful strategy if executed properly. - Amariah Olson, Yield Crowd

4. Not Understanding Long-Term Compounding

The most significant hindrance to achieving long-term financial success is investor behavior. Studies continue to document the significant underperformance of investors versus the performance of the investments they hold. After decades of professionally working with investors, I am convinced that we all start out without a keen enough understanding of the primary importance of long-term compounding. - Vincent Rossi, Intelligent

5. Not Accounting For Future Tax Liability

The majority of Americans are saving their money in tax-deferred accounts. Someone with $500,000 in a 401(k) may think they have $500,000 to generate income in retirement, when the reality is they only have $360,000 or so to generate income. And that assumes the tax rates don’t change. I encourage clients to look into Roth-type options and other strategies that allow them to pay tax now and never pay tax again. - Joshua Sherrard, Strategic Navigators Inc.

6. Not Knowing The Difference Between Net Worth And Cash Flow

There are two ways we can look at personal wealth: net worth and cash flow. Clients need to have a clear understanding that we live on our cash flow, not our net worth, so when income stops, assets must replace that income. While we are working and accumulating wealth, we are focused on net worth. Once we start distributing wealth in retirement, we are focused on cash flow. - Robin Vernon, Proper Wealth

7. Trying To Beat The Market

Clients often unconsciously choose to try to “beat the market” without knowing the consequences of such a choice. When you choose to try and outperform the market, you create a level of dispersion of returns (at best) or underperformance (at worst) that not everybody realizes they are stepping into. The average investor thinks that “beating the market” (such as the S&P 500) is par for the course, but it’s not. - Dan Cupkovic, ARGI Financial Group

8. Thinking A Household Budget Is Unnecessary

Everyone needs a budget, no matter how much they make. It tells them what they are bringing in, what they are spending and how much is left to save and invest. Once they have their budget, they can work on their financial plan to discover where they are, where they are going and how to get there. A budget should be part of the puzzle and embraced! - Aviva Pinto, Wealthspire Advisors

9. Believing It’s Not Worthwhile To Invest Only Small Amounts

There is a misconception that “it takes money to make money,” and that investing small amounts is not worth it. Investing is a strategy to make your money grow, regardless of how much you earn. Generally speaking, long-term investment in the stock market will yield you an 8% to 10% annualized return over time. Even small, regular contributions will compound and accumulate over time. - Sean Frank, Cloud Equity Group

10. Trying To Time The Market

The belief that one can time the market is a fool’s game. It is seldom prudent when clients act quickly based on timing or emotions. Also, constantly moving around a portfolio slows down compound growth. Another misstep is not diversifying enough, especially after building wealth through a company or specific investment. Investors need to take a step back and diversify their portfolios. - Sonya Thadhani Mughal, Bailard, Inc.

11. Thinking Personal Wealth Is Entirely Income-Based

Most individuals assume that building personal wealth is solely based on their income, but earnings only tell half the story. The real key to amassing personal wealth is in how much you can save. A professional can earn six to seven figures annually, but if they aren’t disciplined enough to save a significant portion for a rainy day or retirement, they will struggle to build long-term wealth. - Mara Garcia, Phonexa Holdings, LLC

12. Getting Caught Up In Trends

Many people follow the latest way to “beat the market,” whether that is investing in meme stocks or buying cryptocurrencies. However, the best way to start building your personal wealth is to first manage your debt, and then build up a cushion for any unforeseen expenses that could occur. Only after that should you start to put extra dollars to work through investments. - Anuj Nayar, Lending Club

13. Not Eliminating High-Interest Debt

Before investing money, make sure your high-interest debts are paid off first. Your debt can’t be losing you money faster than you are making money. For example, if you have credit card debt with 20% interest rates while your IRA/401(k) is earning 5% a year, you are most likely going backward financially. - Daniel Blue, Quest Education

14. Going With ‘Your Gut’

The biggest misconception I see from investors is the idea that their feelings matter when it comes to investing. People often say they have a “feeling” that the market is going to go down or up or that “their gut” tells them where the market is going. Feelings are irrelevant when it comes to investing. What really matters is the ability to be patient, even when markets are struggling. - Roxana Maddahi, Steel Peak Wealth Management, LLC

15. Thinking Financial Success Is Down To Chance

Don’t believe that any part of the process of wealth creation is down to chance. Wealth is math. Math is definite, it runs on known formulas and equations, and it can always be solved for. Wealth has been built on this planet for thousands of years, and the fundamentals behind it—and the math—remain the same. The objects and tools might vary, but if you understand it is definite and there is a precise system, wealth becomes much easier to build. - Jerry Fetta, Wealth DynamX

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