8 Critical Factors That Could Crush Your Wealth
Welcome to the 147th edition of the Inkosi Wealth Scoop!
In this episode, we’ll talk about eight wealth killers that could undermine your financial success and discuss proactive steps you can take to mitigate their risks.
- Limb #1: The Concept of Diversification
- Limb#2: Dependence on the Rising Market
- Limb #3: Dependence on your Time, Skill, and Input
- Limb #4: Dependence on your Income or other Assets
- Limb #5: Reasonable Liquidity
- Limb #6: Assets Outside of the Median
- Limb #7: Reliance on Tax Benefits or Change of Government
- Limb #8: Exposure or Reliance on the Banking System and Finance
If you’re an investor or a business owner who wants to protect your wealth and avoid financial pitfalls, then make sure to listen to this episode!
05:19 Limb #1: The Concept of Diversification
08:46 Limb#2: Dependence on the Rising Market
11:03 Limb #3: Dependence on your Time, Skill, and Input
13:31 Limb #4: Dependence on your Income or other Assets
16:16 Limb #5: Reasonable Liquidity
19:08 Limb #6: Assets Outside of the Median
21:27 Limb #7: Reliance on Tax Benefits or Change of Government
23:05 Limb #8: Exposure or Reliance on the Banking System and Finance
25:20 Final Thoughts
How do you stay safe during unpredictable and unstable times, like the current state of the market?
Well, in today’s episode, we will talk about that and more.
Inside my program, I created content to guide you in making smart decisions and taking the necessary actions to stay safe in the next 12 to 18 months.
But before I start, I want to mention something I’ve discussed in my previous podcasts: we can’t predict the future accurately.
Despite various influencers, media, and economic experts trying to forecast what will happen in the next 12 to 18 months, the truth is that no one knows what will happen.
Studies have shown that forecasts are essentially random and cannot be relied upon.
With that in mind, I want to share with you what I call the “eight limbs of wealth stability.”
During a boom cycle, we may not think protecting our wealth and diversifying our investments is that important. We may study these concepts but not take them seriously until a major event happens and we realise we should have paid more attention.
Right now, there is fear in the market and uncertainty about what will happen next.
We don’t know if it will be really bad or if things will turn out okay.
But I don’t want you to feel unprepared and caught off guard if things do take a turn for the worse.
About four years ago, I introduced the “eight limbs of wealth stability” to my high-net-worth investor community. I’ve talked about some aspects of it in previous podcast episodes, but I want to revisit it now in the context of the current market situation.
Clearly, some people will be hurt in the property and stock markets in the second half of this year.
Buyers are hesitant to pay high prices, but sellers are also reluctant to drop their prices.
Until we see some flexibility from either side, the market will not see a big shift, and any changes will happen slowly.
Personally, I like to keep track of properties on realestate.com for fun. I look for properties that could be developed and also for properties that I dream of owning someday.
Recently, I’ve noticed something interesting.
Properties that would have been sold very quickly a year ago are now sitting on the market for a long time without being sold.I haven’t looked at any data, but this observation tells me we might be approaching a problem in the housing market.
The backdrop for what I want to talk about is the framework of the eight limbs of wealth stability.
These are really important if you want to keep your money and continue growing it, no matter what’s happening in the market.
Successful investors know what’s currently going on, but they don’t let it stop them from building wealth. They adjust their strategy as needed to protect what they have and make smart investments.
They know that market conditions can change, so they must be adaptable. They focus on protecting their money and choosing investment strategies to help them succeed in the long term.
Now let’s talk about the eight limbs in more detail.Read More
Limb #1: The Concept of Diversification
Diversification is the first limb of wealth stability, which means spreading your money across different things.
People often say they’re diversified, but it’s not just about investing in different places or companies.
You need to think about diversification in a multifaceted way, which means investing in different markets, assets, and dealmakers and having different ways to get your money out.
You need to ask yourself if you’re diversified enough that you won’t lose everything if one investment goes bad.
In our community, we focus on taking small bites of different things that are already diversified, so even if one investment fails, you’ll still be okay.
The goal is to protect your money and ensure you don’t lose everything.
We’ve talked a lot about ways to protect your money, like loss reserves, but the most important thing is diversification.
You can’t just say you’re diversified. You need to think about it when you look at your investments.
One way to do this is to look at a pie chart that shows where your assets are.
When people first start working with me, they usually have all their money in one place or strategy.
Let me give you an example.
I have a client who has put all of his money into commercial real estate—not just that, but into one market sector in one place with all the same tenants. This is very undiversified and risky.
But through being part of our community, he’s realised that this approach has some vulnerabilities. So even though it has worked well for him in the past, it’s time for him to reconsider and spread his money out more.
Some investors believe in concentrating all their money on one type of investment, like Warren Buffett. But even Buffett has experienced big losses and took a long time to build his wealth.
Most successful investors stress the importance of diversification. So, look at your portfolio and see if you’re diversified enough.
If you have everything in one type of asset, ask yourself how else you are diversified. And if the market crashes, what will happen to your wealth?
Limb#2: Dependence on the Rising Market
The second limb of wealth stability is not relying too much on a rising market.
Some investments are considered investment grade, while others are speculation.
Many people don’t realise that buying an asset and holding it for appreciation over the medium to long term is actually speculation because you’re banking on the assumption that the market will rise and increase the value of your asset.
Doing it with only some of your investments can be okay.
But if you rely entirely on this strategy and the market experiences a correction, pullback, crash, or “black swan” event, you could suffer significant losses.
It’s important to ask yourself how your investments would be affected if the market were to go down or sideways, especially for those planning to retire soon. If your portfolio depends on a rising market, a drop in value could wipe out your hard-earned gains.
For example, during the global financial crisis, many people lost 40% of their net worth and delayed retirement.
If you’re young and have a long time until you retire, you can handle the ups and downs of the market.
But if retirement is on the horizon, you should consider investing in assets that provide consistent and sustainable cash flow to make you less dependent on the market and its ups and downs.
Limb #3: Dependence on your Time, Skill, and Input
The third point is about relying too much on your own time, skills, and effort for investing.
Many people have a job or a business that takes up much of their time and energy. On the other hand, investing doesn’t require as much time but needs regular monitoring.
You should check if your investment portfolio is highly dependent on your time, skills, or effort. If it is, you need to ask yourself if there are any associated risks.
Let me give you an example.
One of my clients has a high-pressure job but works on some development sites as a side hustle.
He recognises that this is a window of opportunity that he can take advantage of now while he’s young enough to handle the workload. But for others, this might not be a feasible option.
In terms of stable wealth, it’s essential to consider if your investment portfolio requires a lot of your time, skills, or effort.
During high volatility, you may need to put more time and effort into those investments, so reassessing your investments and making changes if needed is a good idea.
Limb #4: Dependence on your Income or other Assets
Number four is about your independence or dependence on your income or other assets.
When we enter the workforce, we try to choose assets that will help us grow our wealth the most. This is normal, but sometimes we choose too many assets, which becomes overwhelming. When we’re in uncertain or volatile times, we must consider how much our investments rely on our personal income or other assets.
For example, if you have a large portfolio of assets that depend on your income, and your income is interrupted (like during COVID), the whole portfolio could be at risk. Or, if your assets are all tied up in debt and cross-collateralised, if one asset drops, it could bring down your whole portfolio, which is especially common in commercial real estate.
Let me put it this way: Imagine someone owning many properties, but one of them is a big commercial property.
If that commercial property becomes vacant, it can be difficult to find new tenants for it. In some cases, it can stay vacant for months or even years.
I once saw someone with a great property portfolio, but when their big commercial property became vacant and stayed that way, it affected the cash flow from the other properties. The person was still paying off the loan for the vacant commercial property, but it was not generating any income, making it hard to pay for the other properties.
Eventually, the person lost their entire property portfolio because they couldn’t keep up with the payments.
It’s not common, but it can happen. At least now, you’re aware of this risk.
When you think about how much your investment portfolio relies on your income or other assets you own, assess it carefully. This is a critical factor to consider, and you should rate it as either good (green), concerning (amber), or bad (red).
In fact, for all eight factors I’m discussing today, it’s helpful to evaluate them in this way.
Limb #5: Reasonable Liquidity
Moving on to number five, we have the concept of reasonable liquidity, which basically means having enough emergency cash reserves.
It’s something that everyone understands, but when we try to maximise our wealth growth, we often overlook this and fail to hold enough cash for unforeseen events.
We tend to focus only on day-to-day needs, not potential black swan events.
Many of my clients have been frustrated with insurance, whether it’s building and landlord insurance, life insurance, or income protection insurance.
They thought these policies protected them, but when they went to make a claim, the insurer found some small fine print that allowed them to avoid paying the claim. This has made me cynical and sceptical about insurance.
Even clients who claimed something as simple as flood damage were denied payment based on a minor detail buried in the fine print.
Having enough money for emergencies becomes more complicated when you own a lot of property.
It’s not just about having enough funds to get by for a few months but also considering what happens if your properties become vacant or you earn less income than planned. You have to think about all the possible worst things that could happen and make sure you have enough money to handle them.
As you own more property, you must think about this more carefully.
Many investors may not have enough cash reserves or reasonable liquidity to manage their finances effectively. They may have spent too much money on investments and not kept enough cash for unexpected situations.
With high-interest rates, compressed returns, and rising costs, they may struggle to keep up with the expenses of holding onto their investment properties. This could lead to a difficult decision to sell their investments to alleviate their financial stress.
It’s a tough situation for those who have worked hard to invest, but they may have to step back to improve their financial position.
Limb #6: Assets Outside of the Median
The sixth limb I want to discuss is investing in highly speculative assets outside the median.
Think of all the properties you can invest in as being on a spectrum.
On one end are really cheap and run-down properties, and on the other end are super expensive properties. Most properties fall somewhere in the middle. If you drew a line showing the number of properties, you’d see a bell curve with the most properties in the middle.
This is where I like to invest because it gives me the largest pool of potential tenants and buyers if I ever need to sell.
Right now, I see that the really expensive properties are taking longer to sell, and the really cheap properties aren’t very popular either. So it’s best to invest in properties in the middle.This principle applies to all types of investments. You want to have a large pool of potential renters or buyers.
So, look at your portfolio and see how many of your investments are at the extreme ends of the spectrum.
Limb #7: Reliance on Tax Benefits or Change of Government
Another limb is relying too much on tax benefits or government policies.
Some people focus on investments because they come with tax incentives, and that’s okay. But if you rely too much on those benefits and they suddenly disappear due to a change in government or policy, it can really hurt your investments.
For example, in the US, some people invested in properties with great tax write-offs and depreciation benefits, but the investment itself didn’t perform well and they lost money.
Some high-net-worth investors are focused on reducing their taxes, but it’s crucial not to put the cart before the horse. Even if an investment offers great tax benefits, we still need to make sure it aligns with our investing principles and has sound fundamentals.
If we only pursue investments because of tax incentives, we may struggle if there are big changes to the tax system in the future.
It’s crucial to be aware of this, so give yourself a traffic light rating (red, orange, or green) to assess how much you prioritise tax benefits in your investing strategy.
Limb #8: Exposure or Reliance on the Banking System and Finance
The last point to consider is relying too much on banks and finance.
Be careful when choosing a product or a bank just because it’s cheap without understanding all the details like charges, early exit or payment, refinancing, etc.
If your investment strategy depends heavily on the banking system’s stability and continued access to credit, ensure that every asset you finance achieves your desired outcome.
In some Western countries, income can be a limiting factor in growing your wealth, so relying on bank financing becomes even more important. However, you don’t want to be vulnerable in the next 12 to 18 months. So, it’s best to consider these factors before making investment decisions.
Let me share another story with you.
This happened around 2009. We had a huge portfolio of properties, but the banks told me I couldn’t borrow any more money, and that’s when I started thinking about other options.
So, if you’re in a similar situation, you need to start thinking about other possibilities too.
For me, that was the beginning of exploring alternative investments.
So, these are the eight things that can affect your financial stability:
- Dependence on a rising market
- Dependence on your time, skills, and input
- Dependence on your income or other assets
- Reasonable liquidity
- Assets that sit outside the median or are highly speculative
- Reliance on tax benefits or change of government
- Exposure or reliance on the banking system or finance
Understand your vulnerabilities in these areas, whether you have a green light or if any red flags need attention.
If there are issues, it doesn’t necessarily mean you’re in trouble, but it’s a warning to take action. Maybe there’s nothing you can do, but you can work towards minimising your risks.
I hope this information is helpful for you to have high-quality conversations and make better financial decisions.
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